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Common IRA Distribution Questions

1.                  When may distributions be taken from a Traditional IRA?

Distributions may be taken any time by the IRA holder, and by the beneficiary of the IRA upon the IRA holder's death, but may be subject to tax and penalty.

2.                  How are distributions from a Traditional IRA taxed, and are there penalties?

Generally, amounts received from an IRA are taxable as ordinary income in the year the assets are distributed, however there are exceptions*.  In addition, if the IRA holder is under 59 ½, a 10% penalty will be due.  There are exceptions to the penalty and they can be found on page 6. 

3.                  What are the tax and penalty consequences for distributions for Traditional IRA holders that are 59 ½ and older?

After reaching age 59 ½, IRA owners can take distributions for any reason without facing a 10% penalty.  However, ordinary income tax is due on all taxable distributions

4.                  Who can be appointed as a beneficiary of an IRA?

The IRA holder may appoint whomever they wish as their beneficiary.  They may name one or more individuals, or name entities such as their estate, trust, or a charity. 

5.                  What are the distribution options for the beneficiaries of Traditional IRAs?

The options depend on whether the IRA holder died before or after RMDs had begun (age 70 ½).

6.                  When must RMDs begin?

RMDs for the year 2009 were suspended and Traditional IRA holders must take their 2010 RMD by December 31, 2010. (See Distributions after Age 70 ½, page 10)

7.                  Were subsequent RMDs suspended?

No.  Only the 2009 RMD was suspended. RMDs for 2010 and beyond must continue.

8.                  How are RMDs calculated?

Each year the previous year's December 31 IRA balance is divided by a life expectancy factor found in the Uniform Lifetime Table to be used by everyone. 

9.                  This table is assuming the IRA owner's age and a beneficiary 10 years younger.  Can other tables be used?

The only exception to using the Uniform Lifetime Table is when an IRA owner designates their spouse as the sole beneficiary and the spouse is more than 10 years younger than the owner.  In this case, a joint life expectancy table may be used. 

10.              How does a non-spouse beneficiary of an inherited IRA determine lifetime RMDs?

For the year 2010 and beyond, in the year following the IRA holder’s death, the previous year’s December 31 IRA balance is divided by the life expectancy factor found in the Single Life Expectancy Table.  For subsequent RMDs, the previous year’s December 31 IRA balances will be divided by the “established” life expectancy factor (from the first RMD) reduced by one each year.  For an example, if a 60 year-old beneficiary’s single life expectancy factor is established at 25.2 for the first RMD, the following year’s RMD factor would be 24.2 (25.2 – 1).

11.       Is there a penalty for not taking an RMD?

If the Traditional IRA holder neglects to take an RMD, or takes less than the required amount, a 50% penalty is assessed on the amount that should have been distributed.  Generally, there are no exceptions to the rule.  Note, however, that RMDs for the year 2009 were suspended.

12.        Do RMDs continue after the death of the IRA holder?

Generally, payments must continue at least annually to the designated beneficiary.  A spouse beneficiary however, may roll the balance of the deceased spouse's IRA to his or her own IRA. (See Death after Age 70 ½). 

13.        Are there required minimum distributions in Roth IRAs?

No, there are no RMD requirements for Roth IRAs.

14.        What are the tax or penalty consequences for distributions taken from Roth IRAs?

Taxes or penalties are generally based on the type of contributions that were originally made and the length of time the assets remained in a Roth IRA.  Special "ordering rules" govern the order in which the assets of the Roth IRA must be distributed.

15.        What is the difference between a "qualified tax and penalty free" distribution and a "non-qualified" distribution from a Roth IRA?

If the assets were in the Roth IRA for at least 5 years, and the IRA holder reached

59 ½ years of age, died, became totally disabled, or is a first time home buyer, then no tax or penalty will be due.   However, if the distribution does not meet these requirements, it is considered a "non-qualified” distribution and ordering rules apply. 

16.        What options does the beneficiary of a Roth IRA have upon the holder's death?

For the year 2010 and beyond, generally, the beneficiary must begin taking distributions using their life expectancy or the five-year rule.  However, a spouse may roll the balance of the Roth IRA to his or her own Roth IRA.

17.        What are the tax and penalty issues for beneficiaries of Roth IRAs?

If the assets were held in the Roth IRA for a minimum of 5 years, the distributions will be considered "qualified" and are tax and penalty free.  If the assets were in the Roth IRA for less than 5 years, only the earnings on the original contributions are subject to tax (no penalty).

18.        Are all distributions from ESAs tax and penalty free?

Distributions to pay for education expenses are tax and penalty free.  Any other distribution is subject to tax (on earnings only) and 10% penalty.

19.        What are the distribution options for beneficiaries upon the death of the ESA holder?

These options can be complex and vary according to whether the document that is utilized allows for the naming of a beneficiary.

20.        Does the ESA holder face a deadline to use the ESA assets for educational expenses?

Yes.  Once the owner turns age 30, the IRA is no longer considered an ESA.   The balance must be distributed to the owner within a 30-day period following the owner’s 30th birth date.  Earnings will generally be taxed as ordinary income and subject to a 10% premature penalty tax, unless an exception applies.

NOTE:  Information used in this material was prepared from various sources that were deemed to be reliable, but the accuracy of the information is not guaranteed.  Neither Stifel nor any of its employees are qualified to give legal or tax advice. The brief discussion of taxes in this material is for information purposes only and not intended to be considered tax advice.