2018 Distributions from Individual Retirement Arrangements (IRAs)

In this tax subject, we will review some tax rules that relate to distributions from IRAs. Distributions from individual retirement arrangements (IRAs) are very common. An IRA is a personal savings plan that gives you tax advantages for setting aside money for retirement. As a tax professional, you should be very aware of IRAs such as how to setup an IRA and how one treats distributions from an IRA. You should be well versed in the distribution rules and try to encourage your tax clients to do tax planning to avoid paying penalties and fines.

We will also look at the the penalties and additional taxes that apply when the distribution rules aren’t followed. The worksheets and forms can help you in complying with the tax rules for IRAs.

Disaster tax relief.

New rules provide for tax-favored withdrawals and repayments from certain retirement plans (including IRAs) for taxpayers who suffered economic losses as a result of Hurricane Harvey, Irma, or Maria. You should look for changes to these benefits as disasters keep happening, unfortunately.

IRAs and unrelated business income.

An IRA is subject to tax on unrelated business income if it carries on an unrelated trade or business. An unrelated trade or business means any trade or business regularly carried on by the IRA or by a partnership of which it is a member, and not substantially related to the IRA’s exempt purpose or function.

Application of one-rollover-per-year limitation.

You can make only one rollover from an IRA to another (or the same) IRA in any 12-month period regardless of the number of IRAs you own. However, you can continue to make unlimited trustee-to-trustee transfers between IRAs because a transfer isn’t considered a rollover. Furthermore, you can also make unlimited rollovers from a traditional IRA to a Roth IRA (also known as "conversions").

Deemed IRAs.

A qualified employer plan (retirement plan) can maintain a separate account or annuity under the plan (a deemed IRA) to receive voluntary employee contributions. If the separate account or annuity otherwise meets the requirements of an IRA, it will be subject only to IRA rules. An employee's account can be treated as a traditional IRA or a Roth IRA. For this purpose, a "qualified employer plan" includes a qualified pension, profit-sharing, or stock bonus plan (section 401(a) plan), a qualified employee annuity plan (section 403(a) plan), a tax-sheltered annuity plan (section 403(b) plan), and a deferred compensation plan (section 457 plan) maintained by a state, a political subdivision of a state, or an agency or instrumentality of a state or political subdivision of a state.

Statement of required minimum distribution (RMD).

If an RMD is required from your IRA, the trustee, custodian, or issuer that held the IRA at the end of the preceding year must either report the amount of the RMD to you, or offer to calculate it for you. The report or offer must include the date by which the amount must be distributed. The report is due January 31 of the year in which the minimum distribution is required. It can be provided with the year-end fair market value statement that you normally get each year. No report is required for section 403(b) contracts (generally tax-sheltered annuities) or for IRAs of owners who have died.

IRA interest.

Although interest earned from your IRA is generally not taxed in the year earned, it isn't tax-exempt interest. Tax on your traditional IRA is generally deferred until you take a distribution. Don't report this interest on your return as tax-exempt interest.

Net Investment Income Tax.

For purposes of the Net Investment Income Tax (NIIT), net investment income doesn't include distributions from a qualified retirement plan (for example, 401(a), 403(a), 403(b), or 457(b) plans, and IRAs). However, these distributions are taken into account when determining the modified adjusted gross income threshold. Distributions from a nonqualified retirement plan are included in net investment income.

What are some tax advantages of an IRA?

Two tax advantages of an IRA are that contributions you make to an IRA may be fully or partially deductible, depending on which type of IRA you have and on your circumstances, and generally, amounts in your IRA (including earnings and gains) aren't taxed until distributed. In some cases, amounts aren't taxed at all if distributed according to the rules. If you follow the rules, that is, distributions from IRAs, for handling inherited IRAs, and receiving distributions (making withdrawals) from an IRA. You must also know how to process penalties and additional taxes that apply when the rules aren't followed. The rules that you must follow depend on which type of IRA you have.

Tax treatment of distributions from traditional IRAs

We will mainly discuss distributions from an IRA in this tax course. The original IRA (sometimes called an ordinary or regular IRA) is referred to as a "traditional IRA." It is very simple, a traditional IRA is any IRA that isn't a Roth IRA or a SIMPLE IRA.

What if You Inherit an IRA?

If you inherit a traditional IRA, you are called a beneficiary. A beneficiary can be any person or entity the owner chooses to receive the benefits of the IRA after he or she dies. Beneficiaries of a traditional IRA must include in their gross income any taxable distributions they receive.

Inherited from spouse.

If you inherit a traditional IRA from your spouse, you generally can treat it as your own IRA by designating yourself as the account owner, you can treat it as your own by rolling it over into your IRA, or to the extent it is taxable, into a qualified employer plan, qualified employee annuity plan (section 403(a) plan), tax-sheltered annuity plan (section 403(b) plan), into a deferred compensation plan of a state or local government (section 457 plan), or treat yourself as the beneficiary rather than treating the IRA as your own.

Treating it as your own.

You will be considered to have chosen to treat the IRA as your own if contributions (including rollover contributions) are made to the inherited IRA, or you don't take the required minimum distribution for a year as a beneficiary of the IRA. However, you will only be considered to have chosen to treat the IRA as your own if you are the sole beneficiary of the IRA, and you have an unlimited right to withdraw amounts from it.

However, if you receive a distribution from your deceased spouse's IRA, you can roll that distribution over into your own IRA within the 60-day time limit, as long as the distribution isn't a required distribution, even if you aren't the sole beneficiary of your deceased spouse's IRA.

Inherited from someone other than spouse.

If you inherit a traditional IRA from anyone other than your deceased spouse, you can't treat the inherited IRA as your own. This means that you can't make any contributions to the IRA. It also means you can't roll over any amounts into or out of the inherited IRA. However, you can make a trustee-to-trustee transfer as long as the IRA into which amounts are being moved is set up and maintained in the name of the deceased IRA owner for the benefit of you as beneficiary.

Like the original owner, you generally won't owe tax on the assets in the IRA until you receive distributions from it. You must begin receiving distributions from the IRA under the rules for distributions that apply to beneficiaries.

IRA with basis.

If you inherit a traditional IRA from a person who had a basis in the IRA because of nondeductible contributions, that basis remains with the IRA. Unless you are the decedent's spouse and choose to treat the IRA as your own, you can't combine this basis with any basis you have in your own traditional IRA(s) or any basis in traditional IRA(s) you inherited from other decedents. If you take distributions from both an inherited IRA and your IRA, and each has basis, you must complete separate Forms 8606 to determine the taxable and nontaxable portions of those distributions.

Federal estate tax deduction.

A beneficiary may be able to claim a deduction for estate tax resulting from certain distributions from a traditional IRA. The beneficiary can deduct the estate tax paid on any part of a distribution that is income in respect of a decedent. He or she can take the deduction for the tax year the income is reported.

Any taxable part of a distribution that isn't income in respect of a decedent is a payment the beneficiary must include in income. However, the beneficiary can't take any estate tax deduction for this part.

A surviving spouse can roll over the distribution to another traditional IRA and avoid including it in income for the year received.

When Can You Withdraw or Use Assets?

You can withdraw or use your traditional IRA assets at any time. However, a 10% additional tax generally applies if you withdraw or use IRA assets before you reach age 59½.

You generally can make a tax-free withdrawal of contributions if you do it before the due date for filing your tax return for the year in which you made them. This means that even if you are under age 59½, the 10% additional tax may not apply.

When Must You Withdraw Assets?

You have a required minimum distributions obligation and you must withdraw your assets by a specified period. You can't keep funds in a traditional IRA (including SEP and SIMPLE IRAs) indefinitely. Eventually they must be distributed. If there are no distributions, or if the distributions aren't large enough, you may have to pay a 50% excise tax on the amount not distributed as required. Excess accumulations or insufficient distributions is an act that will result in Penalties or Additional Taxes. The requirements for distributing IRA funds differ, depending on whether you are the IRA owner or the beneficiary of a decedent's IRA.

Required minimum distribution.

The amount that must be distributed each year is referred to as the required minimum distribution.

Distributions not eligible for rollover.

Amounts that must be distributed (required minimum distributions) during a particular year aren't eligible for rollover treatment. Please note that a qualified charitable distribution will count towards your required minimum distribution.

IRA Owners

If you are the owner of a traditional IRA, you must generally start receiving distributions from your IRA by April 1 of the year following the year in which you reach age 70½. April 1 of the year following the year in which you reach age 70½ is referred to as the required beginning date.

Distributions by the required beginning date.

You must receive at least a minimum amount for each year starting with the year you reach age 70½ (your 70½ year). If you don't (or didn't) receive that minimum amount in your 70½ year, then you must receive distributions for your 70½ year by April 1 of the next year. If an IRA owner dies after reaching age 70½, but before April 1 of the next year, no minimum distribution is required because death occurred before the required beginning date.

Even if you begin receiving distributions before you reach age 70½, you must begin calculating and receiving required minimum distributions by your required beginning date.

More than minimum received.

If, in any year, you receive more than the required minimum distribution for that year, you won't receive credit for the additional amount when determining the minimum required distributions for future years. This doesn't mean that you don't reduce your IRA account balance. It means that if you receive more than your required minimum distribution in one year, you can't treat the excess (the amount that is more than the required minimum distribution) as part of your required minimum distribution for any later year. However, any amount distributed in your 70½ year will be credited toward the amount that must be distributed by April 1 of the following year.

Distributions after the required beginning date.

The required minimum distribution for any year after the year you turn 70½ must be made by December 31 of that later year. For example, if you reach age 70½ on August 20, 2017, for 2017, you must receive the required minimum distribution from your IRA by April 1, 2018. You must receive the required minimum distribution for 2018 by December 31, 2018. If you don't receive your required minimum distribution for 2017 until 2018, both your 2017 and your 2018 distributions will be included in income on your 2018 return.

Distributions from individual retirement account.

If you are the owner of a traditional IRA that is an individual retirement account, you or your trustee must figure the required minimum distribution for each year. Owner's of IRAs are required to receive minimum distributions.

Distributions from individual retirement annuities.

If your traditional IRA is an individual retirement annuity, special rules apply to figuring the required minimum distribution.

Change in marital status.

For purposes of figuring your required minimum distribution, your marital status is determined as of January 1 of each year. If your spouse is a beneficiary of your IRA on January 1, he or she remains a beneficiary for the entire year even if you get divorced or your spouse dies during the year. For purposes of determining your distribution period, a change in beneficiary is effective in the year following the year of death or divorce.

Change of beneficiary.

If your spouse is the sole beneficiary of your IRA, and he or she dies before you, your spouse won't fail to be your sole beneficiary for the year that he or she died solely because someone other than your spouse is named a beneficiary for the rest of that year. However, if you get divorced during the year and change the beneficiary designation on the IRA during that same year, your former spouse won't be treated as the sole beneficiary for that year.

Figuring the Owner's Required Minimum Distribution

Figure your required minimum distribution for each year by dividing the IRA account balance as of the close of business on December 31 of the preceding year by the applicable distribution period or life expectancy. Alternatively, distribution periods and life expectancy tables are available to figure the required minimum distribution for each year.

IRA account balance.

The IRA account balance is the amount in the IRA at the end of the year preceding the year for which the required minimum distribution is being figured.

Contributions.

Contributions increase the account balance in the year they are made. If a contribution for last year isn't made until after December 31 of last year, it increases the account balance for this year, but not for last year. Disregard contributions made after December 31 of last year in determining your required minimum distribution for this year.

Outstanding rollovers and recharacterizations.

The IRA account balance is adjusted by outstanding rollovers and recharacterizations of Roth IRA conversions that aren't in any account at the end of the preceding year.

For a rollover from a qualified plan or another IRA that wasn't in any account at the end of the preceding year, increase the account balance of the receiving IRA by the rollover amount valued as of the date of receipt.

If a conversion contribution is contributed to a Roth IRA and that amount (plus net income allocable to it) is transferred to another IRA in a subsequent year as a recharacterized contribution, increase the account balance of the receiving IRA by the recharacterized contribution (plus allocable net income) for the year in which the conversion occurred.

Distributions.

Distributions reduce the account balance in the year they are made. A distribution for last year made after December 31 of last year reduces the account balance for this year, but not for last year. Disregard distributions made after December 31 of last year in determining your required minimum distribution for this year. For example, Laura was born on October 1, 1946. She reaches age 70½ in 2017. Her required beginning date is April 1, 2018. As of December 31, 2016, her IRA account balance was $26,500. No rollover or recharacterization amounts were outstanding. Using the available tables, the applicable distribution period for someone her age (71) is 26.5 years. Her required minimum distribution for 2017 is $1,000 ($26,500 ÷ 26.5). That amount is distributed to her on April 1, 2018.

To illustrate further, Joe, born October 1, 1946, reached 70½ in 2017. His wife (his beneficiary) turned 56 in September 2017. He must begin receiving distributions by April 1, 2018. Joe's IRA account balance as of December 31, 2016, is $30,100. Because Joe's wife is more than 10 years younger than Joe and is the sole beneficiary of his IRA, Joe uses the tables and based on their ages at year end (December 31, 2017), the joint life expectancy for Joe (age 71) and his wife (age 56) is 30.1 years. The required minimum distribution for 2017, Joe's first distribution year, is $1,000 ($30,100 ÷ 30.1). This amount is distributed to Joe on April 1, 2018.

Distribution period.

This is the maximum number of years over which you are allowed to take distributions from the IRA. The period to use for 2017 is listed next to your age as of your birthday in 2017 in the distributions tables.

Life expectancy.

Make sure you use the correct table for your life expectancy for 2018 is listed in the table next to your age as of your birthday in 2018. If you use the wrong table, your life expectancy is listed where the row or column containing your age as of your birthday in 2018 intersects with the row or column containing your spouse's age as of his or her birthday in 2018.

Distributions during your lifetime.

Required minimum distributions during your lifetime are based on a distribution period that generally is determined using the uniform lifetime table. However, if the sole beneficiary of your IRA is your spouse who is more than 10 years younger than you, you must use the joint life and last survivor expentancyh table instead for a spouse who is more than 10 years younger than you.

To figure the required minimum distribution for 2018, divide your account balance at the end of 2017 by the distribution period from the table. This is the distribution period listed next to your age (as of your birthday in 2018), unless the sole beneficiary of your IRA is your spouse who is more than 10 years younger than you. For example, you own a traditional IRA and your account balance at the end of 2017 was $100,000. You are married and your spouse, who is the sole beneficiary of your IRA, is 6 years younger than you. You turn 75 years old in 2018. Using the correct tables, you find that your distribution period is 22.9. Your required minimum distribution for 2018 would be $4,367 ($100,000 ÷ 22.9).

Sole beneficiary spouse who is more than 10 years younger.

If the sole beneficiary of your IRA is your spouse and your spouse is more than 10 years younger than you, use the joint life and last survivor expectancy table to figure your minimum distribution amount. The life expectancy to use is the joint life and last survivor expectancy listed where the row or column containing your age as of your birthday in 2018 intersects with the row or column containing your spouse's age as of his or her birthday in 2018.

You figure your required minimum distribution for 2018 by dividing your account balance at the end of 2017 by the life expectancy from the joint life and last survivor expectancy table. For example, you own a traditional IRA and your account balance at the end of 2017 was $100,000. You are married and your spouse, who is the sole beneficiary of your IRA, is 11 years younger than you. You turn 75 in 2018 and your spouse turns 64. Your joint life and last survivor expectancy is 23.6. Your required minimum distribution for 2018 would be $4,237 ($100,000 ÷ 23.6).

Distributions in the year of the owner's death.

The required minimum distribution for the year of the owner's death depends on whether the owner died before the required beginning date. If the owner died before the required beginning date, there is no required minimum distribution in the year of the owner's death.

If the owner died on or after the required beginning date, the IRA beneficiaries are responsible for figuring and distributing the owner's required minimum distribution in the year of death. The owner's required minimum distribution for the year of death generally is based on the uniform lifetime table. However, if the sole beneficiary of the IRA is the owner's spouse who is more than 10 years younger than the owner, use the life expectancy from the joint life and last survivor expectancy table. Please note that you figure the required minimum distribution for the year in which an IRA owner dies as if the owner lived for the entire year.

IRA Beneficiaries

The rules for determining required minimum distributions for beneficiaries depend on if the beneficiary is the surviving spouse, if the beneficiary is an individual (other than the surviving spouse), the beneficiary isn't an individual (for example, the beneficiary is the owner's estate) or if the IRA owner died before the required beginning date, or died on or after the required beginning date.

Rules for required minimum distributions and beneficiaries.

If distributions to the beneficiary from an inherited traditional IRA are less than the required minimum distribution for the year (Required Minimum Distributions), you may have to pay a 50% excise tax for that year on the amount not distributed as required. In this case you would be dealing with excess accumulations (Insufficient Distributions) and considered an act that results in penalties or additional taxes.

Surviving spouse.

If you are the surviving spouse who is the sole beneficiary of your deceased spouse's IRA, you may elect to be treated as the owner and not as the beneficiary. If you elect to be treated as the owner, you determine the required minimum distribution (if any) as if you were the owner beginning with the year you elect or are deemed to be the owner. Please note that if you become the owner in the year your deceased spouse died, don't determine the required minimum distribution for that year using your life. Rather, you must use the deceased owner's required minimum distribution for that year to the extent it wasn't already distributed to the owner before his or her death.

You can never make a rollover contribution of a required minimum distribution. Any rollover contribution is subject to the 6% tax on excess contributions.

For any year after the owner’s death, where a surviving spouse is the sole designated beneficiary of the account and he or she fails to take a required minimum distribution (if one is required) by December 31 under the rules for beneficiaries, he or she will be deemed the owner of the IRA. This usually happens when you inherit the IRA from a spouse.

Date the designated beneficiary is determined.

Generally, the designated beneficiary is determined on September 30 of the calendar year following the calendar year of the IRA owner's death. In order to be a designated beneficiary, an individual must be a beneficiary as of the date of death. Any person who was a beneficiary on the date of the owner's death, but isn't a beneficiary on September 30 of the calendar year following the calendar year of the owner's death (because, for example, he or she disclaimed entitlement or received his or her entire benefit), won't be taken into account in determining the designated beneficiary. An individual may be designated as a beneficiary either by the terms of the plan or, if the plan permits, by affirmative election by the employee specifying the beneficiary. Please note that if a person who is a beneficiary as of the owner's date of death dies before September 30 of the year following the year of the owner's death without disclaiming entitlement to benefits, that individual, rather than his or her successor beneficiary, continues to be treated as a beneficiary for determining the distribution period. There are exceptions to the rule, however.

Death of a beneficiary.

In general, the beneficiaries of a deceased beneficiary must continue to take the required minimum distributions after the deceased beneficiary’s death, based on the distribution schedule established by that beneficiary under the rules in the following paragraphs. The beneficiaries of a deceased beneficiary don't calculate required minimum distributions using their own life expectancies. There is an exception to this rule, however.

More than one beneficiary.

If an IRA has more than one beneficiary or a trust is named as beneficiary, you must follow other rules for required minimum distributions.

Owner Died On or After Required Beginning Date

If the owner died on or after his or her required beginning date (defined earlier), and you are the designated beneficiary, you must base required minimum distributions for years after the year of the owner's death on the longer of your single life expectancy as determined for an individual beneficiary or the owner's life expectancy as determined for death on or after required beginning date.

Surviving spouse is sole designated beneficiary.

If the owner died on or after his or her required beginning date and his or her spouse is the sole designated beneficiary, the life expectancy the spouse must use to figure his or her required minimum distribution may change in a future distribution year. This change will apply where the spouse is older than the deceased owner or the spouse treats the IRA as his or her own.

Owner Died Before Required Beginning Date

If the owner died before his or her required beginning date, and you are the designated beneficiary, you generally must base required minimum distributions for years after the year of the owner's death using your single life expectancy tables.

There are sitiations where an individual designated beneficiary may be required to take the entire account by the end of the fifth year following the year of the owner's death. If the owner's beneficiary isn't an individual (for example, if the beneficiary is the owner's estate), the 5-year rule will definitely apply.

Special rules for surviving spouse.

If the owner died before his or her required beginning date and the surviving spouse is the sole designated beneficiary, the year of first required distribution and the death of surviving spouse prior to date distributions begins rules apply.

Year of first required distribution.

If the owner died before the year in which he or she reached age 70½, distributions to the spouse don't need to begin until the year in which the owner would have reached age 70½.

Death of surviving spouse prior to date distributions begin.

If the surviving spouse dies before December 31 of the year he or she must begin receiving required minimum distributions, the surviving spouse will be treated as if he or she were the owner of the IRA. However, this rules does not apply to the surviving spouse of a surviving spouse. For example, your spouse died in 2015, at age 65½. You are the sole designated beneficiary of your spouse’s traditional IRA. You don't need to take any required minimum distribution until December 31 of 2020, the year your spouse would have reached age 70½. If you die prior to that date, you will be treated as the owner of the IRA for purposes of determining the required distributions to your beneficiaries. To illustrate further, if you die in 2017, your beneficiaries won't have any required minimum distribution for 2017 because you, treated as the owner, died prior to your required beginning date. They must start taking distributions under the general rules for an owner who died prior to the required beginning date.

In another example, with information same as above except your sole beneficiary upon your death in 2017 is your surviving spouse. Your surviving spouse can't wait until the year you would have turned 70½ to take distributions using his or her life expectancy. Also, if your surviving spouse dies prior to the date he or she is required to take a distribution, he or she isn't treated as the owner of the account. Just like any other individual beneficiary of an owner who dies before the required beginning date, your surviving spouse must start taking distributions in 2018 based on his or her life expectancy (or elect to fully distribute the account under the 5-year rule by the end of 2022)

Furthermore, the second surviving spouse from above can still elect to treat the IRA as his or her own IRA or roll over any distributions that aren't required minimum distributions into his or her own IRA.

The 5-year rule.

The 5-year rule requires the IRA beneficiaries to withdraw 100% of the IRA by December 31 of the year containing the fifth anniversary of the owner’s death. For example, if the owner died in 2017, the beneficiary would have to fully distribute the plan by December 31, 2022. The beneficiary is allowed, but not required, to take distributions prior to that date. The 5-year rule never applies if the owner died on or after his or her required beginning date.

Individual designated beneficiaries.

The terms of most IRA plans require individual designated beneficiaries to take required minimum distributions using the life expectancy rules unless such beneficiaries elect to take distributions using the 5-year rule. The deadline for making this election is December 31 of the year the beneficiary must take the first required distribution using his or her life expectancy (or December 31 of the year containing the fifth anniversary of the owner's death, if earlier).

Beneficiary not an individual.

The 5-year rule applies in all cases where there is no individual designated beneficiary by September 30 of the year following the year of the owner’s death or where any beneficiary isn't an individual (for example, the owner named his or her estate as the beneficiary). Review the IRA plan documents or consult with the IRA custodian or trustee for specifics on the 5-year rule provisions of any particular plan.

If the 5-year rule applies, the amount remaining in the IRA, if any, after December 31 of the year containing the fifth anniversary of the owner's death is subject to the 50% excise tax.

Figuring the Beneficiary's Required Minimum Distribution

How you figure the required minimum distribution depends on whether the beneficiary is an individual or some other entity, such as a trust or estate.

Beneficiary is an individual.

If the beneficiary is an individual, to figure the required minimum distribution for 2018, divide the account balance at the end of 2017 by the appropriate life expectancy table (Single Life Expectancy). Determine the appropriate life expectancy.

Spouse as sole designated beneficiary.

Use the life expectancy listed in the table next to the spouse's age (as of the spouse's birthday in 2018). Use this life expectancy even if the spouse died in 2018.

If the spouse died in 2017 or a prior year, use the life expectancy listed in the table next to the spouse’s age as of his or her birthday in the year he or she died. Reduce the life expectancy by one for each year since the year following the spouse’s death.

You can't make a rollover contribution of your required minimum distributions in years after the owner's death. Such contribution is subject to the 6% tax on excess contributions.

Other designated beneficiary.

Use the life expectancy listed in the table next to the beneficiary's age as of his or her birthday in the year following the year of the owner's death. Reduce the life expectancy by one for each year since the year following the owner's death. As discussed in Death of a beneficiary , earlier, if the designated beneficiary dies before his or her portion of the account is fully distributed, continue to use the designated beneficiary's remaining life expectancy to determine the distribution period; don't use the life expectancy of any subsequent beneficiary.

For example, your father died in 2017. You are the designated beneficiary of your father's traditional IRA. You are 53 years old in 2018, which is the year following your father's death. You use the appropriate life expectancy table  and see that your life expectancy in 2018 is 31.4. If the IRA was worth $100,000 at the end of 2017, your required minimum distribution for 2018 would be $3,185 ($100,000 ÷ 31.4). If the value of the IRA at the end of 2018 was again $100,000, your required minimum distribution for 2019 would be $3,289 ($100,000 ÷ 30.4 (31.4 reduced by 1, which is the number of years following the year after your father's death in 2017)).

Beneficiary not an individual.

If the beneficiary isn't an individual, determine the required minimum distribution for 2018 in a different manner.

Death on or after required beginning date.

Divide the account balance at the end of 2017 by the appropriate life expectancy table (Single Life Expectancy). Use the life expectancy listed next to the owner's age as of his or her birthday in the year of death. Reduce the life expectancy by one for each year after the year of death. You should note that you must also figure the required minimum distribution for an individual beneficiary using this method if it results in a longer life expectancy where the owner died on or after the required beginning date.

Death before required beginning date.

The 5-year rule (discussed earlier) applies. The entire account must be distributed by the end of the fifth year following the year of the owner's death. No distribution is required for any year before that fifth year. For example, the owner died in 2017 at the age of 80. The owner's traditional IRA went to his estate. The account balance at the end of 2017 was $100,000. In 2018, the required minimum distribution would be $10,870 ($100,000 ÷ 9.2). (The owner's life expectancy in the year of death, 10.2, reduced by one.) If the owner had died in 2017 at the age of 70, the entire account would have to be distributed by the end of 2022.

Which Table Do You Use To Determine Your Required Minimum Distribution?

There are three different life expectancy tables. The tables are found IRS publications. You use only one of them to determine your required minimum distribution for each traditional IRA. You must determine which one to use. In using the tables for lifetime distributions, marital status is determined as of January 1 each year. Divorce or death after January 1 is generally disregarded until the next year. However, if you divorce and change the beneficiary designation in the same year, your former spouse can't be considered your sole beneficiary for that year.

Surviving spouse.

If you are the owner's surviving spouse and sole designated beneficiary, you will also use Table I for your required minimum distributions. However, if the owner hadn't reached age 70½ when he or she died, and you don't elect to be treated as the owner of the IRA, you don't have to take distributions until the year in which the owner would have reached age 70½.

If you are a designated beneficiary figuring your first distribution, use your age as of your birthday in the year distributions must begin. This is usually the calendar year immediately following the calendar year of the owner's death. After the first distribution year, reduce your life expectancy by one for each subsequent year. If you are the owner's surviving spouse and the sole designated beneficiary, this is generally the year in which the owner would have reached age 70½. After the first distribution year, use your age as of your birthday in each subsequent year.

Owner's life expectancy.

In cases where the owner dies on or after the required beginning date, you need to use the owner's life expectancy. First, you need to use it when the owner dies on or after the required beginning date and there is no designated beneficiary as of September 30 of the year following the year of the owner's death. In this case, use the owner's life expectancy for his or her age as of the owner's birthday in the year of death and reduce it by one for each subsequent year. Second, use the owner’s life expectancy in the year of death (reduced by one for each subsequent year) if it results in a longer distribution period than using your life expectancy.

Installments allowed.

The yearly required minimum distribution can be taken in a series of installments (monthly, quarterly, etc.) as long as the total distributions for the year are at least as much as the minimum required amount.

More than one IRA.

If you have more than one traditional IRA, you must determine a separate required minimum distribution for each IRA. However, you can total these minimum amounts and take the total from any one or more of the IRAs. For example, Sara, born August 1, 1946, became 70½ on February 1, 2017. She has two traditional IRAs. She must begin receiving her IRA distributions by April 1, 2018. On December 31, 2016, Sara's account balance from IRA A was $10,000; her account balance from IRA B was $20,000. Sara's brother, age 64 as of his birthday in 2017, is the beneficiary of IRA A. Her husband, age 78 as of his birthday in 2017, is the beneficiary of IRA B.

Sara's required minimum distribution from IRA A is $377 ($10,000 ÷ 26.5 (the distribution period for age 71 per the life expectancy table. The amount of the required minimum distribution from IRA B is $755 ($20,000 ÷ 26.5). The amount that must be withdrawn by Sara from her IRA accounts by April 1, 2018, is $1,132 ($377 + $755).

More than minimum received.

If, in any year, you receive more than the required minimum amount for that year, you won't receive credit for the additional amount when determining the minimum required amounts for future years. This doesn't mean that you don't reduce your IRA account balance. It means that if you receive more than your required minimum distribution in one year, you can't treat the excess (the amount that is more than the required minimum distribution) as part of your required minimum distribution for any later year. However, any amount distributed in your 70½ year will be credited toward the amount that must be distributed by April 1 of the following year. For example, Justin became 70½ on December 15, 2017. Justin's IRA account balance on December 31, 2016, was $38,400. He figured his required minimum distribution for 2017 was $1,401 ($38,400 ÷ 27.4 (the distribution period for age 70 per the appropriate life expectancy table). By December 31, 2017, he had actually received distributions totaling $3,600, $2,199 more than was required. Justin can't use that $2,199 to reduce the amount he is required to withdraw for 2018, but his IRA account balance is reduced by the full $3,600 to figure his required minimum distribution for 2018. Justin's reduced IRA account balance on December 31, 2017, was $34,800. Justin figured his required minimum distribution for 2018 is $1,313 ($34,800 ÷ 26.5 (the distribution period for age 71 per life expectancy table)). During 2018, he must receive distributions of at least that amount.

Multiple individual beneficiaries.

If as of September 30 of the year following the year in which the owner dies there is more than one beneficiary, the beneficiary with the shortest life expectancy will be the designated beneficiary if all of the beneficiaries are individuals, and if the account or benefit hasn't been divided into separate accounts or shares for each beneficiary.

Separate accounts.

A single IRA can be split into separate accounts or shares for each beneficiary. These separate accounts or shares can be established at any time, either before or after the owner's required beginning date. Generally, these separate accounts or shares are combined for purposes of determining the minimum required distribution. However, these separate accounts or shares won't be combined for required minimum distribution purposes after the death of the IRA owner if the separate accounts or shares are established by the end of the year following the year of the IRA owner's death. Please note that the separate account rules can't be used by beneficiaries of a trust.

Trust as beneficiary.

A trust can't be a designated beneficiary even if it is a named beneficiary. However, the beneficiaries of a trust will be treated as having been designated beneficiaries for purposes of determining required minimum distributions after the owner’s death (or after the death of the owner’s surviving spouse described in Death of surviving spouse prior to date distributions begin ) if the trust is a valid trust under state law, or would be but for the fact that there is no corpus and the trust is irrevocable or became, by its terms, irrevocable upon the owner's death. Additionally, the beneficiaries of the trust who are beneficiaries with respect to the trust's interest in the owner's benefit are identifiable from the trust instrument. The trustee of the trust provides the IRA custodian or trustee with the documentation required by that custodian or trustee. The trustee of the trust should contact the IRA custodian or trustee for details on the documentation required for a specific plan.

The deadline for the trustee to provide the beneficiary documentation to the IRA custodian or trustee is October 31 of the year following the year of the owner's death.

Trust beneficiary is another trust.

If the beneficiary of the trust (which is the beneficiary of the IRA) is another trust and both trusts meet the above requirements, the beneficiaries of the other trust will be treated as having been designated as beneficiaries for purposes of determining the distribution period. Please note that the separate account rules can't be used by beneficiaries of a trust.

Annuity distributions from an insurance company.

Special rules apply if you receive distributions from your traditional IRA as an annuity purchased from an insurance company. See Regulations sections 1.401(a)(9)-6 and 54.4974-2. These regulations can be found in many libraries, IRS offices, and online at IRS.gov.

Are Distributions Taxable?

In general, distributions from a traditional IRA are taxable in the year you receive them.

Failed financial institutions.

Distributions from a traditional IRA are taxable in the year you receive them even if they are made without your consent by a state agency as receiver of an insolvent savings institution. This means you must include such distributions in your gross income unless you roll them over.

Exceptions.

Exceptions to distributions from traditional IRAs being taxable in the year you receive them are for items such as rollovers, qualified charitable distributions, tax-free withdrawals of contributions, and for the return of nondeductible contributions.

Although a conversion of a traditional IRA is considered a rollover for Roth IRA purposes, it isn't an exception to the rule that distributions from a traditional IRA are taxable in the year you receive them. Conversion distributions are includible in your gross income subject to this rule and the special rules for conversions.

Qualified charitable distributions.

A qualified charitable distribution (QCD) is generally a nontaxable distribution made directly by the trustee of your IRA (other than a SEP or SIMPLE IRA) to an organization eligible to receive tax deductible contributions. You must be at least age 70½ when the distribution was made. Also, you must have the same type of acknowledgment of your contribution that you would need to claim a deduction for a charitable contribution.

The maximum annual exclusion for QCDs is $100,000. Any QCD in excess of the $100,000 exclusion limit is included in income as any other distribution. If you file a joint return, your spouse can also have a QCD and exclude up to $100,000. The amount of the QCD is limited to the amount of the distribution that would otherwise be included in income. If your IRA includes nondeductible contributions, the distribution is first considered to be paid out of otherwise taxable income.

A QCD will count towards your required minimum distribution requirement. Also, you can't claim a charitable contribution deduction for any QCD not included in your income. For example, on December 23, 2017, Jeff, age 75, directed the trustee of his IRA to make a distribution of $25,000 directly to a qualified 501(c)(3) organization (a charitable organization eligible to receive tax-deductible contributions). The total value of Jeff's IRA is $30,000 and consists of $20,000 of deductible contributions and earnings and $10,000 of nondeductible contributions (basis). Since Jeff is at least age 70½ and the distribution is made directly by the trustee to a qualified organization, the part of the distribution that would otherwise be includible in Jeff's income ($20,000) is a QCD.

In this case, Jeff has made a QCD of $20,000 (his deductible contributions and earnings). Because Jeff made a distribution of nondeductible contributions from his IRA, he must file Form 8606 with his return. Jeff includes the total distribution ($25,000) on line 15a of Form 1040. He completes Form 8606 to determine the amount to enter on line 15b of Form 1040 and the remaining basis in his IRA. Jeff enters -0- on line 15b. This is Jeff's only IRA and he took no other distributions in 2017. He also enters "QCD" next to line 15b to indicate a qualified charitable distribution.

After the distribution, his basis in his IRA is $5,000. If Jeff itemizes deductions and files Schedule A with Form 1040, the $5,000 portion of the distribution attributable to the nondeductible contributions can be deducted as a charitable contribution, subject to AGI limits. He can't take the charitable contribution deduction for the $20,000 portion of the distribution that wasn't included in his income.

One-time qualified HSA funding distribution.

You may be able to make a qualified HSA funding distribution from your traditional IRA or Roth IRA to your Health Savings Account (HSA). You can't make this distribution from an ongoing SEP IRA or SIMPLE IRA. For this purpose, a SEP IRA or SIMPLE IRA is ongoing if an employer contribution is made for the plan year ending with or within your tax year in which the distribution would be made. The distribution must be less than or equal to your maximum annual HSA contribution.

This distribution must be made directly by the trustee of the IRA to the trustee of the HSA. The distribution isn't included in your income, isn't deductible, and reduces the amount that can be contributed to your HSA. You must make the distribution by the end of the year; the special rule allowing contributions to your HSA for the previous year if made by your tax return filing deadline doesn't apply. The qualified HSA funding distribution is reported on Form 8889 for the year in which the distribution is made.

One-time transfer.

Generally, only one qualified HSA funding distribution is allowed during your lifetime. If you own two or more IRAs, and want to use amounts in multiple IRAs to make a qualified HSA funding distribution, you must first make an IRA-to-IRA transfer of the amounts to be distributed into a single IRA, and then make the one-time qualified HSA funding distribution from that IRA.

Testing period rules apply.

If at any time during the testing period you cease to meet all requirements to be an eligible individual, the amount of the qualified HSA funding distribution is included in your gross income. The qualified HSA funding distribution is included in gross income in the taxable year you first fail to be an eligible individual. This amount is subject to the 10% additional tax (unless the failure is due to disability or death).

Ordinary income.

Distributions from traditional IRAs that you include in income are taxed as ordinary income.

No special treatment.

In figuring your tax, you can't use the 10-year tax option or capital gain treatment that applies to lump-sum distributions from qualified retirement plans.

Distributions Fully or Partly Taxable

Distributions from your traditional IRA may be fully or partly taxable, depending on whether your IRA includes any nondeductible contributions.

Fully taxable.

If only deductible contributions were made to your traditional IRA (or IRAs, if you have more than one), you have no basis in your IRA. Because you have no basis in your IRA, any distributions are fully taxable when received. You must also be aware of the reporting and withholding requirements for taxable amounts.

Partly taxable.

If you made nondeductible contributions or rolled over any after-tax amounts to any of your traditional IRAs, you have a cost basis (investment in the contract) equal to the amount of those contributions. These nondeductible contributions aren't taxed when they are distributed to you. They are a return of your investment in your IRA.

Only the part of the distribution that represents nondeductible contributions and rolled over after-tax amounts (your cost basis) is tax free. If nondeductible contributions have been made or after-tax amounts have been rolled over to your IRA, distributions consist partly of nondeductible contributions (basis) and partly of deductible contributions, earnings, and gains (if there are any). Until all of your basis has been distributed, each distribution is partly nontaxable and partly taxable.

Use Form 8606.

You must complete Form 8606, and attach it to your return, if you receive a distribution from a traditional IRA and have ever made nondeductible contributions or rolled over after-tax amounts to any of your traditional IRAs. Using the form, you will figure the nontaxable distributions for 2017, and your total IRA basis for 2017 and earlier years.

Please note that if you are required to file Form 8606, but you aren't required to file an income tax return, you still must file Form 8606. Complete Form 8606, sign it, and send it to the IRS at the time and place you would otherwise file an income tax return.

Figuring the Nontaxable and Taxable Amounts

If your traditional IRA includes nondeductible contributions and you received a distribution from it in 2017, you must use Form 8606 to figure how much of your 2017 IRA distribution is tax free.

Please note that when figuring the nontaxable and taxable amounts of distributions made prior to death in the year the IRA account owner dies, the value of all traditional (including SEP) and SIMPLE IRAs should be figured as of the date of death instead of December 31.

Contribution and distribution in the same year.

If you received a distribution in 2017 from a traditional IRA and you also made contributions to a traditional IRA for 2017 that may not be fully deductible because of the income limits, you can use Worksheet 1-1 to figure how much of your 2017 IRA distribution is tax free and how much is taxable. Then you can figure the amount of nondeductible contributions to report on Form 8606. Follow the instructions for reporting your nontaxable distribution on Form 8606 to figure your remaining basis after the distribution.

Reporting your nontaxable distribution on Form 8606.

To report your nontaxable distribution and to figure the remaining basis in your traditional IRA after distributions, you must complete the appropriate worksheet before completing Form 8606 and then follow these steps to complete Form 8606. You may also need to enter your nondeductible contributions to your traditional IRAs on Form 8606.

Please note that when used in the worksheets, the term outstanding rollover refers to an amount distributed from a traditional IRA as part of a rollover that, as of December 31, 2017, hadn't yet been reinvested in another traditional IRA, but was still eligible to be rolled over tax free.

It is important to notice that if the amount includes an amount converted to a Roth IRA by December 31, 2017, you must determine the percentage of the distribution allocable to the conversion. To figure the percentage, divide the amount converted (from line 16 of Form 8606) by the total distributions.

Recognizing Losses on Traditional IRA Investments

If you have a loss on your traditional IRA investment, you can recognize (include) the loss on your income tax return, but only when all the amounts in all your traditional IRA accounts have been distributed to you and the total distributions are less than your unrecovered basis, if any.

Your basis is the total amount of the nondeductible contributions in your traditional IRAs.

You claim the loss as a miscellaneous itemized deduction, subject to the 2%-of-adjusted-gross-income limit that applies to certain miscellaneous itemized deductions on Schedule A (Form 1040). Any such losses are added back to taxable income for purposes of calculating the alternative minimum tax. For example, Bill King has made nondeductible contributions to a traditional IRA totaling $2,000, giving him a basis at the end of 2016 of $2,000. By the end of 2017, his IRA earns $400 in interest income. In that year, Bill receives a distribution of $600 ($500 basis + $100 interest), reducing the value of his IRA to $1,800 ($2,000 + $400 − $600) at year's end. Bill figures the taxable part of the distribution and his remaining basis on Form 8606.

In 2018, Bill's IRA has a loss of $500. At the end of that year, Bill's IRA balance is $1,300 ($1,800 − $500). Bill's remaining basis in his IRA is $1,500 ($2,000 − $500). Bill receives the $1,300 balance remaining in the IRA. He can claim a loss for 2018 of $200 (the $1,500 basis minus the $1,300 distribution of the IRA balance).

There are two other special IRA distribution Situations which you must know about such as the distribution of an annuity contract from your IRA account and the cashing of retirement bonds.

Distribution of an annuity contract from your IRA account.

You can tell the trustee or custodian of your traditional IRA account to use the amount in the account to buy an annuity contract for you. You aren't taxed when you receive the annuity contract (unless the annuity contract is being converted to an annuity held by a Roth IRA). You are taxed when you start receiving payments under that annuity contract.

Tax treatment.

If only deductible contributions were made to your traditional IRA since it was opened (this includes all your traditional IRAs, if you have more than one), the annuity payments are fully taxable.

If any of your traditional IRAs include both deductible and nondeductible contributions, the annuity payments are taxed.

Cashing in retirement bonds.

When you cash in retirement bonds, you are taxed on the entire amount you receive. Unless you have already cashed them in, you will be taxed on the entire value of your bonds in the year in which you reach age 70½. The value of the bonds is the amount you would have received if you had cashed them in at the end of that year. When you later cash in the bonds, you won't be taxed again.

Reporting and Withholding Requirements for Taxable Amounts

If you receive a distribution from your traditional IRA, you will receive Form 1099-R, or a similar statement. IRA distributions are shown in boxes 1 and 2a of Form 1099-R. A number or letter code in box 7 tells you what type of distribution you received from your IRA.

Number codes.

All of the number codes are explained in the instructions for recipients on Form 1099-R. Here are a few other number codes.

1—Early distribution, no known exception.

2—Early distribution, exception applies.

3—Disability.

4—Death.

5—Prohibited transaction.

7—Normal distribution.

8—Excess contributions plus earnings/excess deferrals (and/or earnings) taxable in 2017.

Please note that if code 1, 5, or 8 appears on your Form 1099-R, you are probably subject to a penalty or additional tax. If code 1 appears this has to do with early distributions. If code 5 appears, this has to do with prohibited transactions. If code 8 appears, this has to do with excess contributions.

Letter codes.

All of the letter codes are explained in the instructions for recipients on Form 1099-R. Here are a few other letter codes.

B—Designated Roth account distribution.

G—Direct rollover of a distribution (other than a designated Roth account distribution) to a qualified plan, a section 403(b) plan, a governmental section 457(b) plan, or an IRA.

H—Direct rollover of a designated Roth account distribution to a Roth IRA.

J—Early distribution from a Roth IRA.

N—Recharacterized IRA contribution made for 2017 and recharacterized in 2017.

P—Excess contributions plus earnings/ excess deferrals taxable in 2016.

Q—Qualified distribution from a Roth IRA.

R—Recharacterized IRA contribution made for 2016 and recharacterized in 2017.

S—Early distribution from a SIMPLE IRA in the first 2 years, no known exception.

T—Roth IRA distribution, exception applies.

If the distribution shown on Form 1099-R is from your IRA, SEP IRA, or SIMPLE IRA, the small box in box 7 (labeled IRA/SEP/SIMPLE) should be marked with an "X."

If code J, P, or S appears on your Form 1099-R, you are probably subject to a penalty or additional tax. If code J appears, this has to do with early distributions. If code P appears, this has to do with excess contributions. If code S appears, this code has to do with distributions (withdrawals).

Withholding.

Federal income tax is withheld from distributions from traditional IRAs unless you choose not to have tax withheld.

The amount of tax withheld from an annuity or a similar periodic payment is based on your marital status and the number of withholding allowances you claim on your withholding certificate (Form W-4P). If you haven't filed a certificate, tax will be withheld as if you are a married individual claiming three withholding allowances.

Generally, tax will be withheld at a 10% rate on nonperiodic distributions.

IRA distributions delivered outside the United States.

In general, if you are a U.S. citizen or resident alien and your home address is outside the United States or its possessions, you can't choose exemption from withholding on distributions from your traditional IRA.

To choose exemption from withholding, you must certify to the payer under penalties of perjury that you aren't a U.S. citizen, a resident alien of the United States, or a tax-avoidance expatriate.

Even if this election is made, the payer must withhold tax at the rates prescribed for nonresident aliens.

Reporting taxable distributions on your return.

Report fully taxable distributions, including early distributions, on Form 1040, line 15b (no entry is required on line 15a); Form 1040A, line 11b (no entry is required on line 11a); or Form 1040NR, line 16b (no entry is required on line 16a). If only part of the distribution is taxable, enter the total amount on Form 1040, line 15a; Form 1040A, line 11a; or Form 1040NR, line 16a, and enter the taxable part on Form 1040, line 15b; Form 1040A, line 11b; or Form 1040NR, line 16b. You can't report distributions on Form 1040EZ or Form 1040NR-EZ.

Estate tax.

Generally, the value of an annuity or other payment receivable by any beneficiary of a decedent's traditional IRA that represents the part of the purchase price contributed by the decedent (or by his or her former employer(s)) must be included in the decedent's gross estate.

What Acts Result in Penalties or Additional Taxes?

The tax advantages of using traditional IRAs for retirement savings can be offset by additional taxes and penalties if you don't follow the rules. There are additions to the regular tax for using your IRA funds in prohibited transactions. There are also additional taxes for the activities such as investing in collectibles, having unrelated business income, taking early distributions, allowing excess amounts to accumulate (failing to take required distributions), and making excess contributions.

There are penalties for overstating the amount of nondeductible contributions. There is also a penalty for failing to file Form 8606, if the filing of Form 8606 is required.

Besides these, there are other acts (relating to distributions) that you should avoid. There are additional taxes and other costs, which includes even the loss of IRA status if you don't avoid certain prohibited acts.

Prohibited Transactions

Generally, a prohibited transaction is any improper use of your traditional IRA account or annuity by you, your beneficiary, or any disqualified person. Disqualified persons include your fiduciary and members of your family (spouse, ancestor, lineal descendant, and any spouse of a lineal descendant).

Some examples of prohibited transactions which you should avoid with a traditional IRAs are borrowing money from it, selling property to it, using it as security for a loan, and buying property for personal use (present or future) with IRA funds. If your IRA invested in nonpublicly traded assets or assets that you directly control, the risk of engaging in a prohibited transaction in connection with your IRA may be increased.

Fiduciary.

For these purposes, a fiduciary includes anyone who does any of the following. Anyone who exercises any discretionary authority or discretionary control in managing your IRA or exercises any authority or control in managing or disposing of its assets. Anyone who provides investment advice to your IRA for a fee, or to have any authority or responsibility to do so. Anyone who has any discretionary authority or discretionary responsibility in administering your IRA.

Effect on an IRA account.

Generally, if you or your beneficiary engages in a prohibited transaction in connection with your traditional IRA account at any time during the year, the account stops being an IRA as of the first day of that year.

Effect on you or your beneficiary.

If your account stops being an IRA because you or your beneficiary engaged in a prohibited transaction, the account is treated as distributing all its assets to you at their fair market values on the first day of the year. If the total of those values is more than your basis in the IRA, you will have a taxable gain that is includible in your income. You need to know how to figure your gain and how to report it in income. Your distribution may be subject to additional taxes or penalties.

Borrowing on an annuity contract.

If you borrow money against your traditional IRA annuity contract, you must include in your gross income the fair market value of the annuity contract as of the first day of your tax year. You may have to pay the 10% additional tax on early distributions, discussed later.

Pledging an account as security.

If you use a part of your traditional IRA account as security for a loan, that part is treated as a distribution and is included in your gross income. You may have to pay the 10% additional tax on early distributions.

Trust account set up by an employer or an employee association.

Your account or annuity doesn't lose its IRA treatment if your employer or the employee association with whom you have your traditional IRA engages in a prohibited transaction.

Owner participation.

If you participate in the prohibited transaction with your employer or the association, your account is no longer treated as an IRA.

Taxes on prohibited transactions.

If someone other than the owner or beneficiary of a traditional IRA engages in a prohibited transaction, that person may be liable for certain taxes. In general, there is a 15% tax on the amount of the prohibited transaction and a 100% additional tax if the transaction isn't corrected.

Loss of IRA status.

If the traditional IRA ceases to be an IRA because of a prohibited transaction by you or your beneficiary, you or your beneficiary aren't liable for these excise taxes. However, you or your beneficiary may have to pay other taxes. Certain prohibited transactions may have an effect on you or your beneficiary so they must be avoided.

Exempt Transactions

There are two types of transactions which aren't prohibited transactions if they meet certain requirements.

Payments of cash, property, or other consideration by the sponsor of your traditional IRA to you (or members of your family) may not be a prohibited transaction is they meet the requirments. Your receipt of services at reduced or no cost from the bank where your traditional IRA is established or maintained may also not be a prohibited transation is this meets the requirements.

Payments of cash, property, or other consideration.

Even if a sponsor makes payments to you or your family, there is no prohibited transaction if the payments are for establishing a traditional IRA or for making additional contributions to it. Second, there is no prohibited transaction if the IRA is established solely to benefit you, your spouse, and your or your spouse's beneficiaries. Third, there is no prohibited transaction if during the year, the total fair market value of the payments you receive isn't more than $10 for IRA deposits of less than $5,000, or $20 for IRA deposits of $5,000 or more. If all three of the the above mentioned requirements are met, there would be no prohibited transaction even if a sponsor makes payments to you or your family.

If the consideration is group term life insurance, requirements that the payments are for establishing a traditional IRA or for making additional contributions to it, and the requirement that the total fair market value of the payments you receive isn't more than $10 for IRA deposits of less than $5,000, or $20 for IRA deposits of $5,000 or more don't apply if no more than $5,000 of the face value of the insurance is based on a dollar-for-dollar basis on the assets in your IRA.

Services received at reduced or no cost.

Even if a sponsor provides services at reduced or no cost, there is no prohibited transaction if all of the following requirements are met. First, the traditional IRA qualifying you to receive the services is established and maintained for the benefit of you, your spouse, and your or your spouse's beneficiaries. Second, the bank itself can legally offer the services. Third, the services are provided in the ordinary course of business by the bank (or a bank affiliate) to customers who qualify but don't maintain an IRA (or a Keogh plan). Fourth, the determination, for a traditional IRA, of who qualifies for these services is based on an IRA (or a Keogh plan) deposit balance equal to the lowest qualifying balance for any other type of account. Finally, the rate of return on a traditional IRA investment that qualifies isn't less than the return on an identical investment that could have been made at the same time at the same branch of the bank by a customer who isn't eligible for (or doesn't receive) these services. If the all of the above requirements are met, there is no prohibited transaction even if a sponsor provides services at reduced or no cost.

Investment in Collectibles

If your traditional IRA invests in collectibles, the amount invested is considered distributed to you in the year invested. You may have to pay the 10% additional tax on early distributions. Furthermore, any amounts that were considered to be distributed when the investment in the collectible was made, and which were included in your income at that time, aren't included in your income when the collectible is actually distributed from your IRA.

Exception.

Your IRA can invest in one, one-half, one-quarter, or one-tenth ounce U.S. gold coins, or one-ounce silver coins minted by the Treasury Department. It can also invest in certain platinum coins and certain gold, silver, palladium, and platinum bullion.

Collectibles.

Collectibles include artworks, rugs, antiques, metals, gems, stamps, coins, alcoholic beverages such as Cabernets, and certain other tangible personal property.

Unrelated Business Income

An IRA is subject to tax on unrelated business income if it carries on an unrelated trade or business. An unrelated trade or business means any trade or business regularly carried on by the IRA or by a partnership of which it is a member, and not substantially related to the IRA’s exempt purpose or function. If the IRA has $1,000 or more of unrelated trade or business gross income, the IRA must file a Form 990-T, Exempt Organization Business Income Tax Return. An IRA trustee is permitted to file Form 990-T on behalf of the IRA. In the case of an IRA that operates on a calendar year, the Form 990-T must be filed by the 15th day of April following the close of the calendar year. In the case of an IRA that operates on a fiscal year, the Form 990-T must be filed by the 15th day of the 4th month following the close of the fiscal year.

Early Distributions

You must include early distributions of taxable amounts from your traditional IRA in your gross income. Early distributions are also subject to an additional 10% tax, as discussed later.

What is an Early distribution?

Early distributions generally are amounts distributed from your traditional IRA account or annuity before you are age 59½, or amounts you receive when you cash in retirement bonds before you are age 59½.

Age 59½ Rule

Generally, if you are under age 59½, you must pay a 10% additional tax on the distribution of any assets (money or other property) from your traditional IRA. Distributions before you are age 59½ are called early distributions. The 10% additional tax applies to the part of the distribution that you have to include in gross income. It is in addition to any regular income tax on that amount. There are a number of exceptions to this rule.

After age 59½ and before age 70½.

After you reach age 59½, you can receive distributions without having to pay the 10% additional tax. Even though you can receive distributions after you reach age 59½, distributions aren't required until you reach age 70½. You must withdraw your assets, though, to avoid penalties for not withdrawing the required minimum distribution.

Exceptions

There are several exceptions to the age 59½ rule. Even if you receive a distribution before you are age 59½, you may not have to pay the 10% additional tax if you are in certain situations. If you have unreimbursed medical expenses that are more than 7.5% of your adjusted gross income. Another exception applies if the distributions aren't more than the cost of your medical insurance due to a period of unemployment. There are other exceptions such as when

Please note that distributions that are timely and properly rolled over aren't subject to either regular income tax or the 10% additional tax. Certain withdrawals of excess contributions after the due date of your return are also tax free and therefore not subject to the 10% additional tax. This also applies to transfers incident to divorce.

Receivership distributions.

Early distributions (with or without your consent) from savings institutions placed in receivership are subject to this tax unless one of the above exceptions applies. This is true even if the distribution is from a receiver that is a state agency.

Unreimbursed medical expenses.

Even if you are under age 59½, you don't have to pay the 10% additional tax on distributions that aren't more than

the amount you paid for unreimbursed medical expenses during the year of the distribution, minus 7.5% of your adjusted gross income for the year of the distribution.

You can only take into account unreimbursed medical expenses that you would be able to include in figuring a deduction for medical expenses on Schedule A (Form 1040). However, you don't have to itemize your deductions to take advantage of this exception to the 10% additional tax.

Adjusted gross income.

This is the amount on Form 1040, line 38; Form 1040A, line 22; or Form 1040NR, line 37. This term is repeated throughout your tax forms. You get adjusted gross income by subtracting from you gross income. Gross income includes wages, dividends, alimony, capital gains and other taxable items such as retirement distributions.

Medical insurance.

Even if you are under age 59½, you may not have to pay the 10% additional tax on distributions during the year that aren't more than the amount you paid during the year for medical insurance for yourself, your spouse, and your dependents. You won't have to pay the tax on these amounts if you lost your job, if you received unemployment compensation paid under any federal or state law for 12 consecutive weeks because you lost your job, if you receive the distributions during either the year you received the unemployment compensation or the following year, if you receive the distributions during either the year you received the unemployment compensation or the following year, or if you you receive the distributions no later than 60 days after you have been reemployed. If all of the above conditions apply, then you may not have to pay the 10% additional tax on distributions, even if you are under age 59 1/2.

Disabled.

If you become disabled before you reach age 59½, any distributions from your traditional IRA because of your disability aren't subject to the 10% additional tax. You are considered disabled if you can furnish proof that you can't do any substantial gainful activity because of your physical or mental condition. A physician must determine that your condition can be expected to result in death or to be of long, continued, and indefinite duration.

Beneficiary.

If you die before reaching age 59½, the assets in your traditional IRA can be distributed to your beneficiary or to your estate without either having to pay the 10% additional tax. However, if you inherit a traditional IRA from your deceased spouse and elect to treat it as your own, any distribution you later receive before you reach age 59½ may be subject to the 10% additional tax.

Annuity.

You can receive distributions from your traditional IRA that are part of a series of substantially equal payments over your life (or your life expectancy), or over the lives (or the joint life expectancies) of you and your beneficiary, without having to pay the 10% additional tax, even if you receive such distributions before you are age 59½.

You must use an IRS-approved distribution method and you must take at least one distribution annually for this exception to apply. The "required minimum distribution method," when used for this purpose, results in the exact amount required to be distributed, not the minimum amount. There are two other IRS-approved distribution methods that you can use. They are generally referred to as the "fixed amortization method" and the "fixed annuitization method." These two other methods are more complex.

Recapture tax for changes in distribution method under equal payment exception.

You may have to pay an early distribution recapture tax if, before you reach age 59½, the distribution method under the equal periodic payment exception changes (for reasons other than your death or disability). The tax applies if the method changes from the method requiring equal payments to a method that wouldn't have qualified for the exception to the tax. The recapture tax applies to the first tax year to which the change applies. The amount of tax is the amount that would have been imposed had the exception not applied, plus interest for the deferral period.

You may have to pay the recapture tax if you don't receive the payments for at least 5 years under a method that qualifies for the exception. You may have to pay it even if you modify your method of distribution after you reach age 59½. In that case, the tax applies only to payments distributed before you reach age 59½.

Report the recapture tax and interest on Form 5329. Attach an explanation to the form. Don't write the explanation in Form 5329 or enter any amount for the recapture on the form, either. That is what the attached sheet is for.

One-time switch.

If you are receiving a series of substantially equal periodic payments, you can make a one-time switch to the required minimum distribution method at any time without incurring the additional tax. Once a change is made, you must follow the required minimum distribution method in all subsequent years.

Higher education expenses.

Even if you are under age 59½, if you paid expenses for higher education during the year, part (or all) of any distribution may not be subject to the 10% additional tax. The part not subject to the tax is generally the amount that isn't more than the qualified higher education expenses (defined next) for the year for education furnished at an eligible educational institution. The education must be for you, your spouse, or the children or grandchildren of you or your spouse.

When determining the amount of the distribution that isn't subject to the 10% additional tax, include qualified higher education expenses paid with any of the following funds. Payment does not have to be with case. Payment for qualified higher education expense can be with a loan, a gift, an inheritance given to either the student or the individual making the withdrawal. Of course, the payment can be done with a withdrawal from personal savings which includes any savings from a qualified tuition program. This is important because many students pay for higher education with student loans, money given to them by relatives.

However, don't include expenses paid with any type of tax free payment except for the above mentioned gifted money. These types of payments include tax-free distributions from a Coverdell education savings account, tax-free part of scholarships and fellowships, Pell grants, employer-provided educational assistance, veterans' educational assistance or any other tax-free payment other than a gift or inheritance received as educational assistance.

Qualified higher education expenses.

Qualified higher education expenses are tuition, fees, books, supplies, and equipment required for the enrollment or attendance of a student at an eligible educational institution. They also include expenses for special needs services incurred by or for special needs students in connection with their enrollment or attendance. In addition, if the individual is at least a half-time student, room and board are qualified higher education expenses.

Eligible educational institution.

This is any college, university, vocational school, or other postsecondary educational institution eligible to participate in the student aid programs administered by the U.S. Department of Education. It includes virtually all accredited, public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. The educational institution should be able to tell you if it is an eligible educational institution.

First home.

Even if you are under age 59½, you don't have to pay the 10% additional tax on up to $10,000 of distributions you receive to buy, build, or rebuild a first home. To qualify for treatment as a first-time homebuyer distribution, the distribution must be used to pay qualified acquisition costs before the close of the 120th day after the day you received it, must be used to pay qualified acquisition costs for the main home of a first-time homebuyer who is yourself, your spouse, your child or stepchild, your granchild or your stepgrandchild, your parent of your parent in law or any other ancentor. Finally when added to all your prior qualified first-time homebuyer distributions, if any, total qualifying distributions can't be more than $10,000. All these requirements must be met so you don't have to pay the 10% additional tax penalty if you are a first time home buyer. This is so even if you are under the age of 59 1/2.

Please take notice that if both you and your spouse are first-time homebuyers, each of you can receive distributions up to $10,000 for a first home without having to pay the 10% additional tax.

Qualified acquisition costs.

Qualified acquisition costs include costs of buying, building, or rebuilding a home and any usual or reasonable settlement, financing, or other closing costs.

First-time homebuyer.

Generally, you are a first-time homebuyer if you had no present interest in a main home during the 2-year period ending on the date of acquisition of the home which the distribution is being used to buy, build, or rebuild. If you are married, your spouse must also meet this no-ownership requirement.

Date of acquisition.

The date of acquisition is the date that you enter into a binding contract to buy the main home for which the distribution is being used, or when the building or rebuilding of the main home for which the distribution is being used begins.

If you received a distribution to buy, build, or rebuild a first home and the purchase or construction was canceled or delayed, you generally can contribute the amount of the distribution to an IRA within 120 days of the distribution. This contribution is treated as a rollover contribution to the IRA.

Disaster relief.

If you received a distribution to buy, build, or rebuild a first home, but did not buy, build, or rebuild the home because of Hurricane Harvey, Irma, or Maria, you may be able to repay the distribution and not pay income tax or the 10% additional tax on early distributions.

Qualified reservist distributions.

A qualified reservist distribution isn't subject to the additional tax on early distributions.

What is a Qualified reservist distribtuion?

A distribution you receive is a qualified reservist distribution if you were ordered or called to active duty after September 11, 2001 and if you were ordered or called to active duty for a period of more than 179 days or for an indefinite period because you are a member of a reserve component. In addition, the distribution is from an IRA or from amounts attributable to elective deferrals under a section 401(k) or 403(b) plan or a similar arrangement and the distribution was made no earlier than the date of the order or call to active duty and no later than the close of the active duty period. All of these must be met in order for the distribution you receive to be considered a qualified reservist distribution.

Reserve component.

Reserve component means the Army National Guard of the United States, Army Reserve, Naval Reserve, Marine Corps Reserve, Air National Guard of the United States, Air Force Reserve, Coast Guard Reserve, or the Reserve Corps of the Public Health Service.

Additional 10% tax

The additional tax on early distributions is 10% of the amount of the early distribution that you must include in your gross income. This tax is in addition to any regular income tax resulting from including the distribution in income. You must use Form 5329 to figure the tax and to report the additional tax.

For example, Tom Jones, who is 35 years old, receives a $3,000 distribution from his traditional IRA account. Tom doesn't meet any of the exceptions to the 10% additional tax, so the $3,000 is an early distribution. Tom never made any nondeductible contributions to his IRA. He must include the $3,000 in his gross income for the year of the distribution and pay income tax on it. Tom must also pay an additional tax of $300 (10% × $3,000). He must file Form 5329.

SIMPLE

Early distributions of funds from a SIMPLE retirement account made within 2 years of beginning participation in the SIMPLE are subject to a 25%, rather than a 10%, early distributions tax.

Nondeductible contributions.

The tax on early distributions doesn't apply to the part of a distribution that represents a return of your nondeductible contributions (basis).

Excess Accumulations (Insufficient Distributions)

You can't keep amounts in your traditional IRA (including SEP and SIMPLE IRAs) indefinitely. Generally, you must begin receiving distributions by April 1 of the year following the year in which you reach age 70½. The required minimum distribution for any year after the year in which you reach age 70½ must be made by December 31 of that later year.

Tax on excess.

If distributions are less than the required minimum distribution for the year, discussed earlier under When Must You Withdraw Assets? (Required Minimum Distributions) , you may have to pay a 50% excise tax for that year on the amount not distributed as required.

Reporting the tax.

You must use and file Form 5329 to report the tax on excess accumulations.

Request to waive the tax.

If the excess accumulation is due to reasonable error, and you have taken, or are taking, steps to remedy the insufficient distribution, you can request that the tax be waived. If you believe you qualify for this relief, attach a statement of explanation and complete Form 5329.

Exemption from tax.

If you are unable to take required distributions because you have a traditional IRA invested in a contract issued by an insurance company that is in state insurer delinquency proceedings, the 50% excise tax doesn't apply if the conditions and requirements of Revenue Procedure 92-10 are satisfied. These are conditions and requirements which must be met.

Conditions.

To qualify for exemption from the tax, the assets in your traditional IRA must include an affected investment. Also, the amount of your required distribution must be determined and these amounts must be withdrawn in a timely manner.

What is an Affected investment?

Affected investment means an annuity contract or a guaranteed investment contract (with an insurance company) for which payments under the terms of the contract have been reduced or suspended because of state insurer delinquency proceedings against the contracting insurance company.

Requirements.

If your traditional IRA (or IRAs) includes assets other than your affected investment, all traditional IRA assets, including the available portion of your affected investment, must be used to satisfy as much as possible of your IRA distribution requirement. If the affected investment is the only asset in your IRA, as much of the required distribution as possible must come from the available portion, if any, of your affected investment.

Available portion.

The available portion of your affected investment is the amount of payments remaining after they have been reduced or suspended because of state insurer delinquency proceedings.

Make up of shortfall in distribution.

If the payments to you under the contract increase because all or part of the reduction or suspension is canceled, you must make up the amount of any shortfall in a prior distribution because of the proceedings. You make up (reduce or eliminate) the shortfall with the increased payments you receive.

You must make up the shortfall by December 31 of the calendar year following the year that you receive increased payments.

Reporting Additional Taxes

Generally, you must use Form 5329 to report the tax on excess contributions, early distributions, and excess accumulations. If you must file Form 5329, you must use Form 1040 (of Form 1040NR) and not Form 1040A, Form 1040EZ, or Form 1040NR-EZ.

Filing a tax return.

If you must file an individual income tax return, complete Form 5329 and attach it to your Form 1040 or Form 1040NR. Enter the total additional taxes due on Form 1040, line 59, or on Form 1040NR, line 57.

Not filing a tax return.

If you don't have to file a return, but do have to pay one of the additional taxes mentioned earlier, file the completed Form 5329 with the IRS at the time and place you would have filed Form 1040 or Form 1040NR. Be sure to include your address on page 1 and your signature and date on page 2. Enclose, but don't attach, a check or money order payable to the United States Treasury for the tax you owe, as shown on Form 5329. Write your social security number and "2017 Form 5329" on your check or money order.

Form 5329 not required.

You don't have to use Form 5329 if some situations exist. Distribution code 1 (early distribution) is correctly shown in box 7 of Form 1099-R. If you don't owe any other additional tax on a distribution, multiply the taxable part of the early distribution by 10% and enter the result on Form 1040, line 59, or on Form 1040NR, line 57. Put "No" to the left of the line to indicate that you don't have to file Form 5329. However, if you owe this tax and also owe any other additional tax on a distribution, don't enter this 10% additional tax directly on your Form 1040 or Form 1040NR. You must file Form 5329 to report your additional taxes.

You also don't have to file Form 5329 if you rolled over part or all of a distribution from a qualified retirement plan, the part rolled over isn't subject to the tax on early distributions. Furthermore, you don't have to file Form 5329 if you have a qualified disaster distribution.

Roth IRAs

Why invest in a Roth IRA? For starters, future withdrawals are tax free as long as you follow the rules. A roth IRA is different that a traditional IRA in that with Roth IRAs you are not able to deduct the contributions made. This is the case with a traditional IRA. With a Roth IRA, you cannot deduct the contributions made, but when you withdraw it, the income is tax free or can be tax free if you follow the rules. The oposite is true with a traditional IRA. With a traditional IRA, you can deduct the contributions made but your distributions are not usually tax free. However, the contributions can possibly be tax free and this would depend on your circumstances and situation at the time you withdraw. The idea behind this is that you will pay less money on your income at the time you retire because at that time your tax bracket will have lowered substantially. Both the Roth IRA and the traditional IRA have their benefits and drawbacks. You need to decide which one is best for you. It is note worthy to state that you must be eligible to contribute to a Roth IRA because there are income eligibility limits. Don't get your heart set on just these two, there are others.

Deemed IRAs.

For plan years beginning after 2002, a qualified employer plan (retirement plan) can maintain a separate account or annuity under the plan (a deemed IRA) to receive voluntary employee contributions. If the separate account or annuity otherwise meets the requirements of an IRA, it will be subject only to IRA rules. An employee's account can be treated as a traditional IRA or a Roth IRA. For IRA purposes, a "qualified employer plan" includes a qualified pension, profit-sharing, or stock bonus plan (section 401(a) plan), a qualified employee annuity plan (section 403(a) plan), tax-sheltered annuity plan (section 403(b) plan), and a deferred compensation plan (section 457 plan) maintained by a state, a political subdivision of a state, or an agency or instrumentality of a state or political subdivision of a state.

Designated Roth accounts.

Designated Roth accounts are separate accounts under 401(k), 403(b), or 457(b) plans that accept elective deferrals that are referred to as Roth contributions. These elective deferrals are included in your income, but qualified distributions from these accounts aren't included in your income. Designated Roth accounts aren't IRAs and shouldn’t be confused with Roth IRAs. Contributions, up to their respective limits, can be made to Roth IRAs and designated Roth accounts according to your eligibility to participate. A contribution to one doesn't impact your eligibility to contribute to the other.

Contributions not reported.

Regardless of your age, you may be able to establish and make nondeductible contributions to an individual retirement plan called a Roth IRA. However, you don't report Roth IRA contributions on your return.

What Is a Roth IRA?

A Roth IRA is an individual retirement plan that, except that it is subject to the rules that apply to a traditional IRA.  It can be either an account or an annuity. Remember, there are others not just individual retirement accounts but also annuities. To be a Roth IRA, the account or annuity must be designated as a Roth IRA when it is opened. A deemed IRA can be a Roth IRA, but neither a SEP IRA nor a SIMPLE IRA can be designated as a Roth IRA.

Unlike a traditional IRA, you can't deduct contributions to a Roth IRA. But, if you satisfy the requirements, qualified distributions are tax free. Contributions can be made to your Roth IRA after you reach age 70½ and you can leave amounts in your Roth IRA as long as you live.

Traditional IRA.

A traditional IRA is any IRA that isn't a Roth IRA or SIMPLE IRA.

Are Distributions Taxable?

You don't include in your gross income qualified distributions or distributions that are a return of your regular contributions from your Roth IRA(s). You also don't include distributions from your Roth IRA that you roll over tax free into another Roth IRA. You may have to include part of other distributions in your income.

Basis of distributed property.

The basis of property distributed from a Roth IRA is its fair market value (FMV) on the date of distribution, whether or not the distribution is a qualified distribution.

Withdrawals of contributions by due date.

If you withdraw contributions (including any net earnings on the contributions) by the due date of your return for the year in which you made the contribution, the contributions are treated as if you never made them. If you have an extension of time to file your return, you can withdraw the contributions and earnings by the extended due date. The withdrawal of contributions is tax free, but you must include the earnings on the contributions in income for the year in which you made the contributions.

What Are Qualified Distributions?

A qualified distribution is any payment or distribution from your Roth IRA that meets certain requirements such as the following. A qualified distribution is made after the 5-year period beginning with the first taxable year for which a contribution was made to a Roth IRA set up for your benefit, and the payment or distribution made on or after the date you reach age 59½, made because you are disabled, made to a beneficiary or to your estate after your death, or one that meets the requirements listed under First home. This last one is considered an exception and the benefits is only for up to a $10,000 lifetime limit.

Additional Tax on Early Distributions

If you receive a distribution that isn't a qualified distribution, you may have to pay the 10% additional tax on early distributions.

Distributions of conversion and certain rollover contributions within 5-year period.

If, within the 5-year period starting with the first day of your tax year in which you convert an amount from a traditional IRA or rollover an amount from a qualified retirement plan to a Roth IRA, you take a distribution from a Roth IRA, you may have to pay the 10% additional tax on early distributions. You generally must pay the 10% additional tax on any amount attributable to the part of the amount converted or rolled over (the conversion or rollover contribution) that you had to include in income (recapture amount). A separate 5-year period applies to each conversion and rollover. You may also have to determine a recapture amount, if any.

The 5-year period used for determining whether the 10% early distribution tax applies to a distribution from a conversion or rollover contribution is separately determined for each conversion and rollover, and isn't necessarily the same as the 5-year period used for determining whether a distribution is a qualified distribution. It is a good idea to know what are considered qualified distributions. For example, if a calendar-year taxpayer makes a conversion contribution on February 25, 2017, and makes a regular contribution for 2016 on the same date, the 5-year period for the conversion begins January 1, 2017, while the 5-year period for the regular contribution begins on January 1, 2016.

Unless one of the exceptions listed later applies, you must pay the additional tax on the portion of the distribution attributable to the part of the conversion or rollover contribution that you had to include in income because of the conversion or rollover.

You must pay the 10% additional tax in the year of the distribution, even if you had included the conversion or rollover contribution in an earlier year. You also must pay the additional tax on any portion of the distribution attributable to earnings on contributions.

Other early distributions.

Unless one of the exceptions listed below applies, you must pay the 10% additional tax on the taxable part of any distributions that aren't qualified distributions.

Exceptions.

You may not have to pay the 10% additional tax in certain situations such as the following.

If you were affected by Hurricane Harvey, Irma, or Maria, you may qualify for disaster-related relief.

Ordering Rules for Distributions

If you receive a distribution from your Roth IRA that isn't a qualified distribution, part of it may be taxable. There is a set order in which contributions (including conversion contributions and rollover contributions from qualified retirement plans) and earnings are considered to be distributed from your Roth IRA.

    First, you make regular contributions.

    Second, conversion and rollover contributions, on a first-in, first-out basis (generally, total conversions and rollovers from the earliest year first). There are things to consider such as the aggregation (grouping and adding) rules. We take these conversion and rollover contributions into account by looking at the taxable portion (the amount required to be included in gross income because of the conversion or rollover) first, and then the nontaxable portion.

    Third, you must consider the earnings on contributions.

Aggregation (grouping and adding) rules.

Determine the taxable amounts distributed (withdrawn), distributions, and contributions by grouping and adding them together by adding all distributions from all your Roth IRAs during the year together. Then, add all regular contributions made for the year (including contributions made after the close of the year, but before the due date of your return) together. Add this total to the total undistributed regular contributions made in prior years. After that, add all conversion and rollover contributions made during the year together. For purposes of the ordering rules, in the case of any conversion or rollover in which the conversion or rollover distribution is made in 2017 and the conversion or rollover contribution is made in 2018, treat the conversion or rollover contribution as contributed before any other conversion or rollover contributions made in 2018.

Add any recharacterized contributions that end up in a Roth IRA to the appropriate contribution group for the year that the original contribution would have been taken into account if it had been made directly to the Roth IRA. Additionally, disregard any recharacterized contribution that ends up in an IRA other than a Roth IRA for the purpose of grouping (aggregating) both contributions and distributions. Also disregard any amount withdrawn to correct an excess contribution (including the earnings withdrawn) for this purpose.

For example, on October 15, 2013, Justin converted all $80,000 in his traditional IRA to his Roth IRA. His Forms 8606 from prior years show that $20,000 of the amount converted is his basis. Justin included $60,000 ($80,000 − $20,000) in his gross income. On February 23, 2017, Justin made a regular contribution of $5,000 to a Roth IRA. On November 8, 2017, at age 60, Justin took a $7,000 distribution from his Roth IRA. The first $5,000 of the distribution is a return of Justin's regular contribution and isn't includible in his income. Also, the next $2,000 of the distribution isn't includible in income because it was included previously.

Figuring your recapture amount.

If you had an early distribution from your Roth IRAs in 2017, you must allocate the early distribution by using the Recapture Amount by using an allocation chart.

For example, Ishmael, age 32, opened a Roth IRA in 2000. He made the following transactions into his Roth IRA.

    In 2005, he converted $10,000 from his traditional IRA into his Roth IRA. He filled out a 2005 Form 8606 and attached it with his 2005 Form 1040. He entered $0 on line 17 of Form 8606 because he took a deduction for all the contributions to the traditional IRA, therefore he has no basis. He entered $10,000 on line 18 of Form 8606.

    In 2013, he rolled over the entire balance of his qualified retirement plan, $20,000, into a Roth IRA when he changed jobs. He used a 2013 Form 1040 to file his taxes. He entered $20,000 on line 16a of Form 1040 because that was the amount reported in box 1 of his 2013 Form 1099-R. Box 5 of his 2012 Form 1099-R reported $0 since he didn't make any after-tax contributions to the qualified retirement plan. He entered $20,000 on line 16b of Form 1040 since that is the taxable amount that was rolled over in 2013.

The total balance in his Roth IRA as of January 1, 2017 was $105,000 ($50,000 in contributions from 2000 through 2016 + $10,000 from the 2005 conversion + $20,000 from the 2013 rollover + $25,000 from earnings). He hasn't taken any early distribution from his Roth IRA before 2017. In 2017, he made the maximum contribution of $5,500 to his Roth IRA.

In August of 2017, he took a $85,500 early distribution from his Roth IRA to use as a down payment on the purchase of his first home. Based on his allocation, he would enter $20,000 on his 2017 Form 5329, line 1 (see Amount to include on Form 5329, line 1). He should also report $10,000 on his 2017 Form 5329, line 2, and enter exception 09 since that amount isn't subject to the 10% additional tax on early distributions.

How Do You Figure the Taxable Part?

To figure the taxable part of a distribution that isn't a qualified distribution, complete Form 8606, Part III.

Must You Withdraw or Use Assets?

You aren't required to take distributions from your Roth IRA at any age. The minimum distribution rules that apply to traditional IRAs don't apply to Roth IRAs while the owner is alive. However, after the death of a Roth IRA owner, certain of the minimum distribution rules that apply to traditional IRAs also apply to Roth IRAs as when received the distributions after owner's death.

Minimum distributions.

You can't use your Roth IRA to satisfy minimum distribution requirements for your traditional IRA. Nor can you use distributions from traditional IRAs for required distributions from Roth IRAs.

Recognizing Losses on Investments

If you have a loss on your Roth IRA investment, you can recognize the loss on your income tax return, but only when all the amounts in all of your Roth IRA accounts have been distributed to you and the total distributions are less than your unrecovered basis.

Your basis is the total amount of contributions in your Roth IRAs.

You claim the loss as a miscellaneous itemized deduction, subject to the 2%-of-adjusted-gross-income limit that applies to certain miscellaneous itemized deductions on Schedule A (Form 1040). Any such losses are added back to taxable income for purposes of calculating the alternative minimum tax.

Distributions After Owner's Death

If a Roth IRA owner dies, the minimum distribution rules that apply to traditional IRAs apply to Roth IRAs as though the Roth IRA owner died before his or her required beginning date.

Distributions to beneficiaries.

Generally, the entire interest in the Roth IRA must be distributed by the end of the fifth calendar year after the year of the owner's death unless the interest is payable to a designated beneficiary over the life or life expectancy of the designated beneficiary.

If paid as an annuity, the entire interest must be payable over a period not greater than the designated beneficiary's life expectancy and distributions must begin before the end of the calendar year following the year of death. Distributions from another Roth IRA can't be substituted for these distributions unless the other Roth IRA was inherited from the same decedent.

If the sole beneficiary is the spouse, he or she can either delay distributions until the decedent would have reached age 70½ or treat the Roth IRA as his or her own.

Combining with other Roth IRAs.

A beneficiary can combine an inherited Roth IRA with another Roth IRA maintained by the beneficiary only if the beneficiary inherited the other Roth IRA from the same decedent, or Was the spouse of the decedent and the sole beneficiary of the Roth IRA and elects to treat it as his or her own IRA.

Distributions that aren't qualified distributions.

If a distribution to a beneficiary isn't a qualified distribution, it is generally includible in the beneficiary's gross income in the same manner as it would have been included in the owner's income had it been distributed to the IRA owner when he or she was alive.

If the owner of a Roth IRA dies before the end of the 5-year period beginning with the first taxable year for which a contribution was made to a Roth IRA set up for the owner's benefit, or the 5-year period starting with the year of a conversion contribution from a traditional IRA or a rollover from a qualified retirement plan to a Roth IRA, each type of contribution is divided among multiple beneficiaries according to the pro-rata share of each.

For example, when Ms. Hibbard died in 2017, her Roth IRA contained regular contributions of $4,000, a conversion contribution of $10,000 that was made in 2013, and earnings of $2,000. No distributions had been made from her IRA. She had no basis in the conversion contribution in 2013.

When she established this Roth IRA (her first) in 2013, she named each of her four children as equal beneficiaries. Each child will receive one-fourth of each type of contribution and one-fourth of the earnings. An immediate distribution of $4,000 to each child will be treated as $1,000 from regular contributions, $2,500 from conversion contributions, and $500 from earnings.

In this case, because the distributions are made before the end of the applicable 5-year period for a qualified distribution, each beneficiary includes $500 in income for 2017. The 10% additional tax on early distributions doesn't apply because the distribution was made to the beneficiaries as a result of the death of the IRA owner.

If distributions from an inherited Roth IRA are less than the required minimum distribution for the year, you may have to pay a 50% excise tax for that year on the amount not distributed as required. You may need to compute the tax on excess accumulations (insufficient distributions).

Disaster-Related Relief

New rules provide for tax-favored withdrawals and repayments from certain retirement plans (including IRAs) for taxpayers who suffered an economic loss as a result of Hurricane Harvey, Irma, or Maria.

The principles set forth in Notice 2005-92, 2005-51 I.R.B. 165, which provides guidance on the tax-favored treatment of distributions for victims of Hurricane Katrina, also generally apply to these new rules.

If you received a qualified disaster distribution, it is taxable, but isn’t subject to the 10% additional tax on early distributions. The taxable amount is figured in the same manner as other IRA distributions. However, the distribution is included in income ratably over 3 years unless you elect to report the entire amount in the year of distribution. Also, you can repay the distribution and not be taxed on the distribution.

If you received a qualified distribution from an IRA to buy, build, or rebuild a first home but didn’t buy, build, or rebuild the home because of Hurricane Harvey, Irma, or Maria, you may be able to repay the distribution and not pay income tax or the 10% additional tax on early distributions.

Form 8915B, Qualified 2017 Disaster Retirement Plan Distributions and Repayments, is used to report qualified disaster distributions and repayments. Also report qualified distributions for home purchases and construction that were cancelled because of Hurricane Harvey, Irma, or Maria on Form 8915B.

Qualified Disaster Distributions

A qualified disaster distribution is any distribution you received from an eligible retirement plan (including IRAs) if

1. the distribution was made:

2. Your main home was located in a qualified disaster area listed below on the date shown for that area.

3. You sustained an economic loss because of Hurricane Harvey, Irma, or Maria. Examples of an economic loss include, but aren’t limited to:

If 1 through 3 above apply, you can generally designate any distribution (including a periodic payment or a required minimum distribution) from an eligible retirement plan as a qualified disaster distribution, regardless of whether the distribution was made on account of Hurricane Harvey, Irma, or Maria. Qualified disaster distributions are permitted without regard to your need or the actual amount of your economic loss.

Distribution limit.

The total of your qualified disaster distributions from all plans is limited to $100,000. If you have distributions from more than one type of plan, such as a 401(k) plan and an IRA, and the total exceeds $100,000, you may allocate the $100,000 limit among the plans by any reasonable method.

For example, in 2017, you received a distribution of $50,000. In 2018, you receive a distribution of $125,000. Both distributions meet the requirements for a qualified disaster distribution. If you decide to treat the entire $50,000 received in 2017 as a qualified disaster distribution, only $50,000 of the 2018 distribution could be treated as a qualified disaster distribution.

Main home.

Generally, your main home is the home where you live most of the time. A temporary absence due to special circumstances, such as illness, education, business, military service, evacuation, or vacation won’t change your main home.

Eligible retirement plan.

An eligible retirement plan can be

Taxation of qualified disaster distributions.

Qualified disaster distributions are included in income in equal amounts over 3 years. For example, if you received a $60,000 qualified disaster distribution in 2017, you should include $20,000 in your income in 2017, 2018, and 2019. However, if you elect, you can include the entire qualified disaster distribution in your income in the year it was received.

Qualified disaster distributions aren’t subject to the 10% additional tax (or the additional 25% tax for certain distributions from SIMPLE IRAs) on early distributions from qualified retirement plans (including IRAs). Also, if you are receiving substantially equal periodic payments from a qualified retirement plan, the receipt of a qualified disaster distribution from that plan will not be treated as a change in those substantially equal payments merely because of the qualified disaster distribution. However, any distributions you received in excess of the $100,000 qualified disaster distribution limit may be subject to the additional tax on early distributions.

Repayment of Qualified Disaster Distributions

If you choose, you generally can repay any portion of a qualified disaster distribution that is eligible for tax-free rollover treatment to an eligible retirement plan. Also, you can repay a qualified disaster distribution made on account of a hardship from a retirement plan. However, there are exceptions for qualified disaster distributions you cannot repay.

You have 3 years from the day after the date you received the qualified disaster distribution to make a repayment. Amounts that are repaid are treated as a trustee-to-trustee transfer and are not included in income. Also, for purposes of the one-rollover-per-year limitation for IRAs, a repayment to an IRA is not considered a rollover.

Exceptions.

You cannot repay the distributions for

Repayment of qualified disaster distributions if reporting under the 1-year election.

If you elect to include all of your qualified disaster distributions received in a year in income for that year and then repay any portion of the distributions during the allowable 3-year period, the amount repaid will reduce the amount included in income for the year of distribution. If the repayment is made after the due date (including extensions) for your return for the year of distribution, you will need to file a revised Form 8915B with an amended return.

For example, Maria received a $45,000 qualified disaster distribution on November 1, 2017. After receiving reimbursement from her insurance company for a casualty loss, Maria repays $45,000 to an IRA on March 31, 2018. She reports the distribution and the repayment on Form 8915B, which she files with her timely filed 2017 tax return. As a result, no portion of the distribution is included in income on her return.

Repayment of qualified disaster distributions if reporting under the 3-year method.

If you are reporting the distribution in income over the 3-year period and you repay any portion of the distribution to an eligible retirement plan before filing your 2017 tax return, the repayment will reduce the portion of the distribution that is included in income in 2017. If you repay a portion after the due date (including extensions) for filing your 2017 return, the repayment will reduce the portion of the distribution that is included in income in 2018. If you repay a portion after the due date (including extensions) for filing your 2018 return, the repayment will reduce the portion of your distribution that is includible on your 2019 return. If, during a year in the 3-year period, you repay more than is otherwise includible in income for that year, the excess may be carried forward or (after 2017) back to reduce the amount included in income for that year.

For example, John received a $90,000 qualified disaster distribution from his pension plan on November 15, 2017. He doesn’t elect to include the entire distribution in his 2017 income. Without any repayments, he would include $30,000 of the distribution in income on each of his 2017, 2018, and 2019 returns. On November 10, 2018, John repays $45,000 to an IRA. He makes no other repayments during the allowable 3-year period. John may report the distribution and repayment in either by reporting $0 in income on his 2018 return, and carry the $15,000 excess repayment ($45,000 - $30,000) forward to 2019 and reduce the amount reported in that year to $15,000, or by reporting $0 in income on his 2018 return, report $30,000 on his 2019 return, and file an amended return for 2017 to reduce the amount previously included in income to $15,000 ($30,000 - $15,000).

Amending Your Return

If, after filing your original return, you make a repayment, the repayment may reduce the amount of your qualified disaster distributions that were previously included in income. Depending on when a repayment is made, you may need to file an amended tax return to refigure your taxable income.

If you make a repayment by the due date of your original return (including extensions), include the repayment on your amended return.

If you make a repayment after the due date of your original return (including extensions), include it on your amended return only if you elected to include all of your qualified disaster distributions in income in the year of the distribution (not over 3 years) on your original return or if the amount of the repayment exceeds the portion of the qualified disaster distributions that are includible in income for 2018 and you choose to carry the excess back to your 2017 tax return.

For example, you received a qualified disaster distribution in the amount of $90,000 on October 15, 2017. You choose to spread the $90,000 over 3 years ($30,000 in income for 2017, 2018, and 2019). On November 19, 2018, you make a repayment of $45,000. For 2018, none of the qualified disaster distribution is includible in income. The excess repayment of $15,000 can be carried back to 2017. Also, rather than carry the excess repayment back to 2017, you can carry it forward to 2019.

File Form 1040X, to amend a return you have already filed. Generally, Form 1040X must be filed within 3 years after the date the original return was filed, or within 2 years after the date the tax was paid, whichever is later.

Repayment of a Qualified Distribution for the Purchase or Construction of a Main Home

If you received a qualified distribution to purchase or construct a main home in a Hurricane Harvey, Irma, or Maria disaster area, you can repay all or any part of that distribution to an eligible retirement plan during the period beginning on August 23, 2017, and ending on February 28, 2018.

To be a qualified distribution, the distribution must certain requirements. First, the distribution is a hardship distribution from a 401(k) plan, a hardship distribution from a tax-sheltered annuity contract, or a qualified first-time homebuyer distribution from an IRA. Second, the distribution was received after February 28, 2017, and before September 21, 2017. Third, the distribution was to be used to purchase or construct a main home in the Hurricane Harvey, Irma, or Maria disaster area that was not purchased or constructed because of Hurricane Harvey, Irma, or Maria. All of these requirements must be met in order for a distribution to be a qualified distribution for the purchase or construction of a main home.

Additionally, any amount that is repaid before March 1, 2018, is treated as a trustee-to-trustee transfer and is not included in income. Also, for purposes of the one-rollover-per-year limitation for IRAs, a repayment to an IRA is not considered a rollover.

A qualified distribution not repaid before March 1, 2018, may be taxable for 2017 and subject to the additional 10% tax (or the additional 25% tax for certain SIMPLE IRAs) on early distributions.

You must file Form 8915B if you received a qualified distribution that you repaid, in whole or in part, before March 1, 2018.

References:

Wine Spectator.(2018).What Make Wine a Collectible.located at http://www.winespectator.com/drvinny/show/id/5498

Internal Revenue Service (IRS). Publication 590B.(2017).Located at https://www.irs.gov/publications/p590b

Internal Revenue Service (IRS).Distributions from Individual Retirement Arrangements (IRAs).(2017).Located at https://www.irs.gov/pub/irs-pdf/p590b.pdf

Paden, Ramona.What is Adjusted Gross Income (AGI)?.June 16, 2017.Located at https://www.nerdwallet.com/blog/taxes/adjusted-gross-income-agi/