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IRA's Simplified

Colleen Mulder-Seward, MBA
Retirement Calculator, Inc.
IRA's Simplified

For those who are at least 50 years old and planning for retirement, the information available about IRAs can be daunting. This article gives you the key information you need to know in a nutshell.

The current limits on IRA contributions

Contribution limits

The amount you can contribute to your IRA account each year is determined by the IRS.  The age limit on when you can make contributions is limited to 70 ½ with a Traditional IRA.  No such limit applies to the Roth IRA.

Catch-up contributions

You qualify to make additional catch-up contributions if you will have reached age 50 by the end of the year.

Due date for contributions

The due date for IRA contributions is the same for filing your tax return, not including extensions.  Thus, for most people, this means that contributions must be made by April 15. 

The table below shows the contribution limits imposed by the IRS.

Year

Contribution Limit*

Catch-up Contributions Limit

Total Limit for those 50+ years

2005

$4,000

$500

$4,500

2006

$4,000

$1,000

$5,000

2007

$4,000

$1,000

$5,000

2008

$5,000

$1,000

$6,000

2009

$5,000

$1,000

$6,000

*The smaller of amount shown or your taxable compensation for the year.  This amount may be further reduced by modified AGI limits imposed by the IRS.   Source: IRS Publication 590

Minimum required distributions (MRD)

The Internal Revenue Code established these minimums to ensure that you actually use your Employer Sponsored Retirement Plan account balance for its intended purpose - retirement.

Unless an earlier date is specified by your plan, you must take your first withdrawal (MRD) according to the following table:

 

Age

First MRD Date

Subsequent Years MRD

Penalty for not following MRD

Traditional IRA

70 ½

By April 1 of the calendar year following the year in which you become age 70 ½.

Must be made on or before December 31

50% penalty tax on the amount that should have been withdrawn in each calendar year, in addition to regular income taxes.

Roth IRA

Any

You do not have to take distributions regardless of your age.

N/A

N/A

The IRS issued final regulations relating to MRDs from retirement accounts (including 401(k) plan accounts, IRAs, and 403(b) plans) on April 17, 2002, with an effective date of January 1, 2003. The new rules resulted in new life expectancy tables with longer expectancy factors, which generally result in smaller required distribution amounts.

In General, your MRD is determined by dividing the adjusted market value of your tax-deferred retirement account as of December 31 of the prior year, by an applicable life expectancy factor taken from the Uniform Lifetime Table.

Uniform Lifetime

For Use by:

  • Unmarried Owners,
  • Married Owners Whose Spouses Are Not More Than 10 Years Younger, and
  • Married Owners Whose Spouses Are Not the Sole Beneficiaries of their plan

 

Age

Distribution Period

Age

Distribution Period

70

27.4

93

9.6

71

26.5

94

9.1

72

25.6

95

8.6

73

24.7

96

8.1

74

23.8

97

7.6

75

22.9

98

7.1

76

22.0

99

6.7

77

21.2

100

6.3

78

20.3

101

5.9

79

19.5

102

5.5

80

18.7

103

5.2

81

17.9

104

4.9

82

17.1

105

4.5

83

16.3

106

4.2

84

15.5

107

3.9

85

14.8

108

3.7

86

14.1

109

3.4

87

13.4

110

3.1

88

12.7

111

2.9

89

12.0

112

2.6

90

11.4

113

2.4

91

10.8

114

2.1

92

10.2

115 and over

1.9

Note: If the sole beneficiary for the entire year is your spouse, whom is more than 10 years younger, then the Joint Life and Last Survivor Expectancy Table should be used, which could reduce the MRD even further. See IRS Publication 590 - Appendix C for more details.

Source: IRS Publication 590 - Appendix C

Example:

Mary is a retired Traditional IRA account owner who turned 70-1/2 on March 31. On December 31 of last year, the ending balance in her Traditional IRA account was $100,000. To calculate her MRD for this year, divide $100,000 by her life expectancy factor of 26.5 years. Her distribution amount is $3773.59.

Account balance             

Life expectancy factor = MRD

Thus,

$100,000 = $3773.59
26.5

MRDs are subject to federal income tax and may also be subject to state and local taxes. MRDs distributions are not eligible for rollover.

Distributions received before age 59 1/2 from a Traditional IRA are subject to an additional early distribution penalty tax of 10%, unless an exception applies. Distributions received before age 59 1/2 from a Roth IRA may be made tax-free.  This only applies to withdrawal of contributions, not the earnings on the contributions. 

Consult a tax professional before accessing money in your IRA.  Read IRS Publication 590 Individual Retirement Arrangements (IRAs), for more information.

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