All IRAs Affected by Withdrawal Rules
QUESTION: I reach age 70 1/2 this year and have five individual retirement accounts and one Keogh account. Can I consider all the IRAs as one account and withdraw the required minimum amount from one account? Can I consider the five IRAs and one Keogh as one account and make the required total minimum withdrawal from just the Keogh? If I do nothing at all, will the savings institutions automatically withdraw money from each account?--G. B.
ANSWER: You have raised some interesting issues. According to Ellen Marshall, a lawyer specializing in IRA matters in the Costa Mesa office of Morrison & Foerster, Internal Revenue Service regulations state that an IRA account holder must withdraw the minimum required amount from each account.
The minimum withdrawal amount is determined by dividing the life expectancy of the IRA account holder--and the life expectancy of the beneficiary, if there is one--into the account balance at the end of the calendar year before the holder turns 70 1/2. Remember, withdrawals will vary not only with the account balances but also with the life expectancies of your beneficiaries if you have assigned different beneficiaries to your various IRAs.
Marshall says the reason the IRS requires withdrawals from each account is largely a matter of bookkeeping ease for the various institutions holding your IRAs since they can quickly verify that the required disbursements have been taken. Furthermore, this system makes it easier for an IRA holder to determine a minimum withdrawal amount when there are different beneficiaries assigned to various accounts.
The law treats Keogh accounts differently. According to Marshall, Keogh accounts are viewed as elements of a single Keogh plan, so you can combine the totals of your various accounts into a single amount and take the minimum withdrawal from whatever account you want.
What will happen if you do nothing at all? Marshall says the law provides that an account’s trustee--usually the institution at which the account is held--is obligated to distribute the minimum amount. But Marshall says the fine print of several IRA and Keogh accounts provides that, if a holder does not signal an intention to withdraw the minimum before turning age 70 1/2, the institution will distribute the full amount in the account to the holder.
“You need to look at the specific rules of each plan to know how the distribution will be made,” Marshall warns. “There is really nothing to be gained by not filling out the withdrawal form before you reach 70 1/2.”
Q: Can you confirm that individuals over age 65 who are working can take a tax deduction for the maximum individual retirement account contribution if their retirement plans stopped accruing benefits when they reach the age of 65? This means dollars saved for many people who are searching for relief on their 1987 income taxes.--V. B.
A: Better yet, the IRS can confirm it.
According to Section 408 of the Internal Revenue Code, workers who are not actively participating in a retirement plan are entitled to claim a full IRA deduction on their income taxes. The maximum deduction is $2,000 for individuals; $2,250 for married couples with only one working partner. In the case you raise, the IRS says workers who are no longer accruing benefits in a company retirement plan because of their age are no longer considered “active participants” and thus would be eligible for the maximum allowable tax benefit from an IRA contribution.
For more information, see IRS Publication No. 590.
Q: You stated in an earlier column that Social Security payments don’t count in determining whether I can claim my parents as dependents. Can you be more specific and give me the code section?--J. R. S.
A: Yes, but let’s start at the beginning for the benefit of other readers. According to the IRS, there are five tests to determine whether you may claim your elderly parents--or anyone else, for that matter--as dependents on your income tax forms. All five conditions must be met.
The would-be dependents must be U.S. citizens or residents of the United States, Canada or Mexico. You must provide the majority of their support. They may not claim their own personal exemptions ($1,900 per person) on their tax forms. They must be related to you, or be a member of your household for the entire tax year. Finally, their gross income must not exceed the $1,900 personal exemption allowed by the IRS. (This does not apply if the person is your child under age 19 or a student.)
Now for your specific question: The IRS says that Sections 86 and 151(c)(1)(A) of the Internal Revenue Code of 1986 clearly state that Social Security payments are to be excluded when tallying gross income for the purposes of determining dependency.
For more information, see IRS Publication 17, which is available at your local IRS office.
