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It’s Time I Faced Up To An Ugly Phrase: Required Minimum Distributions

At 70 1/2, I'll have to start paying taxes on my traditional IRAs.I turned 66 last month.

Since then, rather than spending my days contemplating my own mortality, I’ve been focusing on something I have a bit more control over — my Individual Retirement Accounts.

I’ve begun thinking about the day I turn 70 1/2 and have to start taking “required minimum distributions.”

Basically, at 70 1/2 the government requires that owners of traditional (non-Roth) IRAs start paying the piper for previously piling up assets free of taxes.

Now, instead of ignoring Lines 15a (“IRA distributions”) and 15b (“Taxable amount”) on my Form 1040, I’ll have to complete them.

I’ll have to withdraw, for each year, an amount determined by dividing the balances in my IRA accounts on the previous Dec. 31 by the number of years remaining in a uniform “distribution period.”

For 2017, that will equal about 3.77% of my IRA balances on Dec. 31, 2016.

The percentage will gradually rise each year thereafter.

I’ll have until April 1, 2018, to take my 2017 distribution, but for subsequent years (starting with 2018), I’ll have to take them by each year’s end.

Most of my withdrawals will be taxable at ordinary rates, both federally and in California.

Although I’ve always known about the distribution requirement, I still find it hard to accept the notion that assets I’ve owned for decades will, overnight, be converted into taxable income.

Whenever I prepare a personal balance sheet, I value my IRA accounts at their full amount, without reduction for future taxes.

I consider this justified because, were I to die tomorrow, those balances would go to a beneficiary that is a tax-exempt, nonprofit institution.

They would, therefore, be subject to neither estate nor income taxes.

Another irritating fact about required minimum distributions (apart from their possibly putting a taxpayer into a higher bracket) is their not-so-obvious potential effect on “means-tested” benefits and obligations.

Medicare Part B and D premiums, for instance, are determined by a beneficiary’s “modified adjusted gross income,” which includes distribution amounts.

The increased premiums triggered by an unduly elevated income can, as Donald Trump would say, be HUGE.

Anyway, together with millions of other oldsters, I’m stuck with the required minimum distribution rules and have to plan accordingly.

I’ll cover this in my next post.

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