IRA Owners and Inheritors Should Act by December 31

December 31 is the date to remember for owners of an IRA or inheritors of an IRA alike. If you set up and funded your own IRA, it is mandatory for you to start taking annual distributions at age 70 ½ by December 31 of each year. IRS tables calculate the mandatory withdrawal and then you are required to pay income tax on that amount.

If you don’t need that amount, donating the assets to charity can be an effective maneuver. Before December 31 of this year, you can donate up to $100,000 from your IRA to charity. The law that allows that may expire at the end of this year. Roths do not require the same minimum distributions annually, so that money can be preserved for your heirs who then must take yearly distributions (tax-free) according to their own life expectancies.

If you inherited an IRA, then you can choose to draw out minimum required distributions over your own expected life span, which could be a beneficial tax strategy. Note that special withdrawal rules will apply to inherited IRAs.

Non-spousal IRA heirs must annually withdraw a minimum amount beginning on December 31 of the year after the IRA owner died. This applies equally to Roths. Spousal heirs have the additional option of rolling the assets into his or her own IRA to delay the required minimum distributions until he or she turns 70 ½. Spouses should wait until the age of 59 ½ to do this, though, to avoid early withdrawal penalties.

See Deborah Jacobs, IRA Owners and Inheritors Must Take Money Out Now, Forbes, Nov. 25, 2011.

Special thanks to Jim Hillhouse (WealthCounsel) for bringing this article to my attention.