IRAs with the exception of the Roth IRA* are subject to required minimum distributions (RMD)as set forth in Section 401(1)(9) of the Code which dictates how and when funds must be taken from qualified and individual retirement plans. The purpose is to prevent perpetual tax sheltering of plan funds by forcing the individual into a distribution mode. This is done by establishing a date by which distributions must begin, specifying time periods by which the funds must be fully distributed, and imposing harsh penalties for noncompliance.

The rules set forth here primarily refer to living participants.
Generally distributions must begin under an IRA starting with the calendar year the individual turns 70 1/2, regardless of employment status. The first distribution may be delayed until the April 1st of the following year, which is referred to as the "required beginning date." Thus if a participant turns 70 on February 14, 2006, their first annual distribution must be taken no later than April 1st, 2007. However, the participant must also take their distribution for 2007 by December 31st, which will then mean two distributions for 2007 to meet the requirement. From this point on distributions must then be taken by December 31 of each calendar year. The calculation is based upon their account balance as of December 31 of the year prior to the year the participant reached 70 1/2.

When a participant delays taking the initial RMD until the following year, for purposes of calculating the RMD for the second year, their account balance is reduced by the amount of the initial distribution. This is the only reduction allowed. Thereafter the account balance as of December 31 of the preceding year is the balance that is used to calculate all future RMDs.

The distribution period for the RMD cannot extend beyond:
· the life expectancy of the participant, or
· the joint life expectancy of the participant and a designated beneficiary(ies).

Penalties
The penalty for not taking a RMD is 50% of the difference between the amount that should have been taken and the amount actually taken. This penalty is imposed on the participant. If a distribution is not taken in a given year, it must be taken the following year in addition to the RMD required for the current year. If the participant has taken more than the required minimum in any year, this amount cannot be used as a "credit" in a future year. The RMD must be taken each year.

Recalculation of life expectancy can occur each year to reduce the amount of the RMD by extending the pay out period. There are three choices which are affected by each participant's circumstances and goals they wish to attain.

• Joint or Single Life Expectancy: There is greater advantage in choosing a joint life expectancy to minimize taxes while the participant is alive and minimize the taxes the beneficiary will be responsible for at the participant's death. Single life expectancy must be used when the beneficiary named is the estate and also for most types of trusts.
• Recalculating or Nonrecalculation of the Participant's Life Expectancy: Usually it is advantageous to recalculate as taxes can be minimized during the participant's life. Nonrecalculation can be an advantage to the beneficiary by minimizing their taxes after the participant's death if the participant dies prematurely.
• Recalculation or Nonrecalculating of the Beneficiary's Life Expectancy: Recalculating the beneficiary's life expectancy is usually advantageous as taxes can be minimized during the participant's life. Only spousal beneficiaries may be recalculated. Nonrecalculating can be advantageous to minimize the beneficiary's taxes after the participant's death if the participant dies prematurely.

Transfers
A required minimum distribution cannot be transferred. It must be taken and applicable taxes must be paid. The penalty for transferring a required minimum distribution in the year it is due is 50%.

Rollovers
Required minimum distributions may not be rolled over. The difference between the penalty for "rolling over" a required distribution is significant compared to a transfer. The penalty is 6% when rolling over a minimum distribution. The reason for the difference in the penalties is that the rollover is considered an excess contribution, whereas a transfer of a required minimum distribution is considered an untaken required minimum distribution.

*Note: Roth IRAs are not subject to Required Minimum Distribution Rules, however, their beneficiaries are.

Disclosure
MEA Financial Services/Paradigm Equities, Inc. does not give tax or legal advice. The comments regarding the law and tax treatment simply reflect our understanding of current interpretations of such laws. Since laws are always subject to interpretation and possible changes, we recommend that you seek the counsel of an attorney, accountant or other qualified tax advisor regarding these matters as it applies to your particular situation.