IRA Timing is Critical: An Advisor’s Guide to Key Ages, Dates and Years

Pop quiz… What do comedy routines and IRA planning have in common? Give up? The answer is “timing is everything!” Unfortunately though, the tax code isn’t exactly friendly when it comes to timing issues. Advisors must be aware of all sorts of different dates, ages and “clocks.”

Age 59 ½ Exception to the 10% Early Distribution Penalty

In general, IRA owners must wait until they are 59 ½ to withdraw IRA funds without a penalty. The age 59 ½ rule is based on a client’s actual age. A person is considered to be 59 ½ on the same numbered day of the month (when possible) six months after they turn 59. For instance, someone born on March 5th will turn 59 ½ on September 5th, regardless of the actual number of days between the two dates.

Age 55 Exception to the 10% Early Distribution Penalty (Plans Only) 

Unlike the age 59 ½ exception to the 10% penalty, the age 55 exception applies to distributions from company plans when the plan participant separates from service in the year they turn 55 or older. For the purpose of this rule, the applicable year is a calendar year and not 365 days.  Remember though; the age 55 exception only applies to distributions made from plans and NOT from IRAs (including SEP and SIMPLE IRAS.

Age 70 ½ Rule for IRA RMDs

Required minimum distributions (RMDs) must begin for the calendar year in which an individual turns 70 ½. This is true even if the IRA owner is still working, as there is no “still working” exception for IRAs, including SEP and SIMPLE IRAs. What makes this rule a little tricky is that even though distributions must begin for a specific calendar year, it’s possible for a client to take their first distribution in either of two calendar years to satisfy the requirement. That’s sounds a little crazy, but here’s how it works…

A distribution taken in the calendar year in which a client turns 70 ½ will count towards fulfilling the client’s first RMD requirement, even if the client is not yet 70 ½. However, a special rule allows clients to defer taking their first RMD until April 1st of the calendar year after the year in which they turn 70 ½. This is known as the required beginning date (RBD). A distribution taken in the calendar year after a client turns 70 ½, but by no later than April 1st, will still satisfy the first year’s RMD requirement without triggering any penalties.

Age 70 ½ Rule for QCDs

Qualified charitable distributions (QCDs) are direct transfers to charitable organizations from an individual’s IRA or inherited IRA. Using this provision, eligible clients are able to exclude the amount transferred, up to $100,000, from AGI. The transfer can also be used to help satisfy a client’s RMD.

As of this writing, QCDs are not currently in effect, but each time it’s expired in the past, it has been brought back (sometimes retroactively) with the same age 70 ½ rule.

Pages: | Next → | Single Page

Jeffrey Levine, CPA

About Jeffrey Levine, CPA

Jeffrey Levine, CPA is an IRA Technical Consultant with Ed Slott and Company, LLC. He is a contributing writer and editor for Ed Slott's IRA Advisor newsletter and has been quoted in numerous publications, from the New York Times to the San Francisco Chronicle. A frequent presenter of advanced training programs, Jeffrey has educated thousands of Financial Advisors and consumers on IRA tax and estate planning strategies. Visit Ed Slott and Company's website at irahelp.com or Email Jeffrey at Jeff@irahelp.com. You can follow Jeffrey on twitter @iraguru4edslott.