Mandatory Annual Distributions from Traditional Individual Retirement Accounts

By Hood, William C. | Michigan Academician, Summer 2003 | Go to article overview

Mandatory Annual Distributions from Traditional Individual Retirement Accounts


Hood, William C., Michigan Academician


INTRODUCTION

When the owner of an individual retirement account (IRA) attains the age of 70 1/2 years, the Internal Revenue Code (IRC) requires the owner to begin taking mandatory annual distributions (MADs) from the account; and when the owner dies, even if the death occurs before age 70 1/2, his beneficiaries will usually have to begin taking MADs in the year after the year of the owner's death. (1)

The law requires MADs because Congress wanted to prevent an unlimited tax-free buildup in these accounts. Since IRAs are not subject to income tax until distributions are made, Congress anticipated that wealthy families, not needing the money to live on, would rarely take any distributions from the IRA; thus, the income tax would be postponed indefinitely.

In order to stop this perceived abuse, the IRC requires distributions, and to enforce this requirement, a 50 percent penalty tax is imposed on the amount of the shortfall if less than the full amount of the MAD is distributed, although IRC section 4974(d) provides that the IRS may waive this penalty if the underpayment was due to reasonable error and if reasonable steps are being taken to remedy the shortfall.

While the concept of MADs may be a good one, its implementation has been confusing to say the least. This is so because the exact manner of calculating the MADs has been ambiguous and extremely complicated, resulting in many IRA owners and their beneficiaries inadvertently making decisions that had adverse tax consequences. Realizing this, the IRS made several attempts to clarify the law, but each attempt seemed to confuse the issue further.

In 2002, the Internal Revenue Service (IRS) finally issued regulations that, while still complex, appear to be fair, understandable and workable. These regulations must be used for all MADs paid out after 2002. (2) This article explains and illustrates these new regulations and assesses their efficacy. Anyone approaching retirement with substantial accumulations in traditional IRAs should familiarize himself with the new mandatory distribution rules for both his retirement and estate planning. (3)

OVERVIEW OF THE MANDATORY ANNUAL DISTRIBUTION CALCULATION

The IRS has published three life expectancy tables that pertain to MADs. (4) The amount of the MAD cannot be calculated until a factor is obtained from one of these tables, which appear in the appendix to this article as:

Table 1. Owner's Table

Table 2. Owner/Younger Spouse Table

Table 3. Beneficiary's Table

After obtaining the factor from the appropriate table, the value of the IRA as of the end of the preceding year is divided by this factor to arrive at the MAD. If the taxpayer has multiple IRAs, the table factor is divided into the total value of all of the IRAs. Once the amount of the MAD is determined, Reg. 1.408-8 A-9 allows the taxpayer to take the MAD from whichever of the IRAs he chooses. For example, if the taxpayer has an IRA at ABC Bank and one at XYZ Broker, he could take his MAD exclusively from the XYZ Broker IRA.

When determining the taxpayer's table factor for the first time (i.e., for the first year that the taxpayer is required to receive a MAD), the taxpayer's age must be known. For subsequent years, the table factor will be determined by using either the Recalculated Age Method or the Reduce by One Method.

The Recalculated Age Method requires that actual ages be used every year. So, for example, if the taxpayer is age 72, the factor would be found by looking up 72 in the appropriate table; then, in the following year, age 73 would be used to find the table factor; then age 74 in the year after that; and so on. The Recalculated Age Method must be used for Tables 1 and 2, and if the owner of the IRA dies and named his spouse as the sole beneficiary of his IRAs, the owner's spouse must use this method for Table 3.

Under the Reduce by One Method, the taxpayer's actual age is only used to find the first MAD factor; thereafter, the first year's factor is reduced by one for each year that passes. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Note: primary sources have slightly different requirements for citation. Please see these guidelines for more information.

Cited article

Mandatory Annual Distributions from Traditional Individual Retirement Accounts
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen
Items saved from this article
  • Highlights & Notes
  • Citations
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Search by... Author
    Show... All Results Primary Sources Peer-reviewed

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.