The First Mandatory IRA Withdrawal
By: Adam Ledbetter, CFP^®
The Henssler Financial Group Position Paper

The initial mandatory IRA withdrawal can be a confusing topic. The rules involving when the first mandatory withdrawal must occur and how much must be withdrawn are relatively simple. However, many still are not sure when the first withdrawal must be completed and how much must be withdrawn.

What assets must be included when calculating a mandatory withdrawal?

Minimum distributions are calculated by applying a divisor (discussed below) to an individual's total combined assets in the following account(s): qualified retirement plans, 403(b) Plans, IRAs, SEPs, SIMPLE IRAs, and section 457 Plans. This article will assume that all plans are rolled into an IRA after retirement, and the total of these combined accounts will be referred to as the "IRA balance."

How much must be withdrawn?

Good news! This question is easy to answer, because there were changes made in 2002 to the distribution rules for IRAs. Unless you are married to someone more than 10 years younger than you, the following chart determines the divisor that is applied to your IRA balance each year to calculate your mandatory withdrawal. If your spouse is more than 10 years younger than you, the divisors are different, but even more in your favor. Consult a tax publication or your C.P.A. for more details.

The annual mandatory withdrawal is calculated by dividing your IRA balance as of the previous year-end by the divisor from the Uniform Lifetime Table chart below. The divisors were increased slightly as of April 17, 2002, allowing slightly smaller mandatory distributions going forward.

For example, if Joe turns 70½ during 2008, he will use his IRA balance as of December 31, 2007, to calculate his 2008 mandatory withdrawal. He will use the divisor that corresponds to his age as of December 31, 2008. If he has turned 71 during the year, his first mandatory withdrawal will use the divisor for age 71 (26.5, from the table below). If he is still 70 as of December 31, 2008, he will use the divisor for age 70 (27.4 from the table). In either case, Joe divides his IRA balance by the divisor to determine his first mandatory withdrawal. If Joe's IRA balance is $500,000, and he is still 70 as of December 31, 2008, his 2008 mandatory withdrawal will be $18,248.18 ($500,000 / 27.4). If Joe has turned 71 by December 31, 2008, his 2008 mandatory withdrawal will be $18,867.92 ($500,000 / 26.5). In any case, a C.P.A. or financial planner should be consulted if you have any questions about your first withdrawal.

Uniform Lifetime Table (as of April 17, 2002)

Age of Employee	Divisor		Age of Employee	Divisor
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+	1.9

 

When must the first mandatory distribution occur?

This is where things get a little tricky. The initial mandatory distribution must occur by April 1 in the year after you reach age 70½. However, each subsequent distribution must occur by December 31 of each following year. Let's look at an example: Joe turns 70½ in May of 2008. His first mandatory distribution must be completed before April 1, 2009. However, his next annual mandatory withdrawal must occur before December 31, 2009, with each annual distribution that follows due by December 31 of each year.

When should the first mandatory distribution occur?

So, Joe has a choice to make. He could take his first IRA withdrawal before the end of 2008, or wait until 2009, so long as it will be completed before April 1, 2009. If he makes the withdrawal in 2008, he will owe income taxes on this withdrawal as regular income received in 2008. However, if he waits until 2009 (before April 1st), he will need to make two distributions in 2009— one for his initial distribution, and one for the second distribution, due before December 31, 2009. Each of these distributions will be taxed as regular income in 2009.

If Joe does not need the IRA distributions to cover living expenses, he has options. If taking two distributions in one year will not move Joe into a higher tax bracket, then waiting until early 2009 to make the initial withdrawal should be considered. If Joe has a large IRA balance, he may want to consider making the initial withdrawal in 2008, and paying the taxes sooner — possibly at a lower tax rate.

In either case, Joe will need to make a withdrawal for 2009 sometime during that year. The 2008 distribution can be delayed until March 31st, only because it is the first distribution. So, this is the question Joe must ask: Am I better off making my initial mandatory withdrawal before the end of 2008, or between January 1 and March 31 of 2009? The answer should be relatively easy to determine, based on how much income Joe receives in retirement. If his income is very limited, making two mandatory withdrawals in 2009 may not pose a problem. If his income already puts him in a higher tax bracket, and the balance in the IRA is substantial, the initial withdrawal should likely be made in 2008.

Remember, the IRS penalty for not making a mandatory withdrawal is severe — 50% of the required withdrawal! So, if Joe's initial withdrawal is $10,000, and he does not make one before April 1, 2009, a $5,000 tax penalty will be assessed. Therefore, The Henssler Financial Group always recommends that individuals consult a C.P.A. if any questions about mandatory withdrawals need to be answered. For more information regarding this topic, please contact The Henssler Financial Group at 770-429-9166 or comments@henssler.com.