If you’ve turned 70 and have a Traditional IRA, please read this.
Federal law requires you to withdraw money from Traditional IRAs (and inherited Roth IRAs) at age 70½. (If you don’t, you’ll owe a 50% penalty on the amount you should have withdrawn.) If you haven’t taken your distribution yet, here are the basics – and a potential tax break you should know about.
Will you turn 70½ in 2007? If so, you have two options. 1) You can take your initial minimum withdrawal this year. Look at your Dec. 31, 2006 IRA balance, divide it by the proper divisor in Appendix C of IRS Publication 590 (Individual Retirement Arrangements), and withdraw at least that amount by Dec. 31, 2007. 2) You can postpone your first required withdrawal until April 1, 2008 – but you’ll have to make a second IRA withdrawal by Dec. 31, 2008, and that means being taxed twice.
Did you turn 70½ in 2006? If you haven’t taken that first mandatory distribution yet, you must do so by April 2, 2007. April 2 is next Monday. If fact, you’ll have to make two withdrawals in 2007. You calculate your initial minimum withdrawal using your Dec. 31, 2005 IRA balance, your age at the end of 2006, and the proper divisor in Appendix C of IRS Publication 590. The second withdrawal has to be made by Dec. 31, 2007. You compute that withdrawal by taking your Dec. 31, 2006 IRA balance and dividing it by the proper divisor in Appendix C, as above. You must withdraw that amount or more by Dec. 31, 2007.
IRA gifts can reduce your taxes. IRA withdrawals are always heavily taxed, at rates up to 35%. But thanks to the Pension Protection Act of 2006, you can get a “senior discount” in 2007. If you’re 70½ or older, you can make a charitable gift through your IRA. Your IRA trustee can transfer up to $100,000 of your IRA assets to charity without incurring taxable income. Under the PPA, these charitable gifts count toward your mandatory annual withdrawal if you’re 70½ or older. Hypothetically, let’s say you’re in the 28% tax bracket and you have to withdraw $20,000 from your IRA this year. If you transfer that $20,000 to a qualified charitable organization before taking any distribution, you can cut your federal taxes by $5,600.
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