Dear Dr. Don,
Traditional IRAs must be liquidated by age 69½. How are gains calculated for tax purposes?
-- Bill Bemoans
Dear Bill,
Traditional IRAs don't have to be liquidated by age 69½. A traditional IRA is, however, subject to required minimum distributions, or RMDs. You have to start taking these distributions in the year you turn 70½, though you can wait until April 1 of the year after you turn 70½. If you wait, you'll have to take two distributions in that year.
Here's how it's presented in the IRS Publication, "Retirement Plans FAQs regarding Required Minimum Distributions":
When is the deadline for receiving a RMD from an IRA?
An account owner must take the first RMD for the year in which he or she turns 70½. However, the first RMD payment can be delayed until April 1 of the year following the year in which he or she turns 70½. For all subsequent years, including the year in which the first RMD was paid by April 1, the account owner must take the RMD by December 31 of the year.
Traditional IRAs are typically funded with pretax dollars. Distributions out of the account after age 59½ are taxed as ordinary income. You don't have to calculate investment gains. If you have nondeductible contributions in your traditional IRA, you can use IRS Form 8606 to determine the taxable portion of a distribution.
Roth IRAs aren't subject to RMDs during the owner's lifetime. Converting your traditional IRA to a Roth IRA will have you owing income taxes on the conversion, but it lets you pass the account on to a beneficiary at your death. If you are subject to RMDs in your traditional IRA, you can't use conversion to eliminate that year's RMD, but it will eliminate subsequent RMDs. The RMD has to be taken prior to conversion.
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