Taking Care of Mom and Dad: Required Distributions

Even though your parents can receive distributions after they reach age 59 1/2, they are not required to take money out of a defined-contribution account until they reach age 70 1/2. Because defined contribution plans are retirement programs (and not programs for allowing unlimited tax shelters), your parents will have to take out the money that they put in. The formula for figuring exactly how much they need to take out each year can be complicated -- but there are some simpler tactics that they can use.

The penalties for leaving too much money in an IRA or 401(k) for too long are even tougher than the penalties for taking money out too early.

If there are no distributions from an IRA or 401(k), or if the distributions are not large enough, your parents may have to pay a 50 percent excise tax on the amounts not distributed.

In case you're thinking about an easy loophole: Required distributions are not eligible for rollover treatment to a new defined contribution plan.

The specific requirements for distributing funds from defined contribution plans differ, depending on whether the person receiving the money is the owner or the beneficiary of the account.

If your parent is the owner of a traditional IRA, by April 1st of the year following the year in which he or she reaches age 70 1/2, that parent must either:

• receive the entire balance in the IRA; or
• start receiving periodic distributions from the IRA.

If your parent doesn't receive the entire balance in the IRA by the required beginning date, he or she must start to receive periodic distributions over one of the following periods:

• his or her life;
• the lives of that parent and a designated beneficiary;
• a period that does not extend beyond the parent's life expectancy; or
• a period that does not extend beyond the joint-life and last survivor expectancy of that parent and a beneficiary.

If your parents choose periodic distributions, they must receive at least a minimum amount for each year starting with the year the account owner reaches age 70 1/2. The money can be taken out as late as April of the following calendar year. But, from then on, the minimum distribution for any year must be made by December 31 of that year.

Example: Your dad reaches age 70 1/2 on August 20, 2003. For 2003, he must receive the minimum required distribution from his IRA by April 1, 2004. He has to receive the minimum required distribution for 2004 (the first year after he reached 70 1/2) by December 31, 2004.