Interesting Tax Questions from Readers

by David D. Holland


“I work full time at a company where I have a pension account and contribute to the retirement account. I just turned 72; should I be taking required minimum distributions from the retirement funds?” – Bill D., Palm Coast


Tax laws require that you to take minimum distributions (RMDs) from your Individual Retirement Accounts after you reach age 70½. The same rules apply to SEP IRAs, SIMPLE IRAs, 401(k) plans, 403(b) plans, 457(b) plans, profit-sharing plans and other employer-based defined contribution plans.


Basically, the Internal Revenue Service (IRS) requires that you take enough out of your IRAs each year to deplete them during your lifetime. To figure the RMD dollar amount each year, you add up all your IRAs at the beginning of the year and then divide by your life expectancy. You don’t get to pick that number yourself. The IRS requires you use the life expectancy for your age from the Uniform Lifetime Table. There are also tables for beneficiaries of retirement funds and account holders with much younger spouses. The life expectancy to be used at age 72, for example, is 25.6 years. If you have four IRAs and they total $100,000 at the beginning of 2013, your required distribution would be $3,906.25 ($100,000 divided by 25.6).


When calculating RMDs, I prefer to use percentages. If you divide 1 by your life expectancy from the IRS’s table, you can convert the RMD into a percentage. For example, The RMD percentage would be 3.9% at age 72 (1 divided by 25.6). The IRS does not care which IRA(s) you take the minimum distribution from, as long as you satisfy the minimum withdrawal amount. The objective is to force withdrawals so “not-taxed-yet” money can be taxed during your lifetime. Toward that end, the percentages you are required to take from your IRAs increase each year. The RMD percentage is 3.65% at age 70, 4.38% at age 75 and 5.35% at age 80. 


Your employment status is not relevant. Employed or not, you must take RMDs from your IRAs by April 1st of the year following the year you turn age 70½. If you work past age 70½, you can delay taking RMDs from your current employer’s retirement plan until April 1st following the calendar year you retire. If you fail to take required distributions, or don’t take enough, you could face a 50% tax penalty on the amount you should have taken.


“We own a home valued at about $250,000 that we would like to give to a very close life-long friend. Would we be required to pay any type of taxes for this gift?” – Jim H., Volusia

Assuming you haven’t exhausted your $5,250,000 lifetime exemption from estate and gift taxes, you shouldn’t owe gift taxes on the transfer to your friend, but you have to file Form 709 with the IRS.


One word of caution for your friend: because you are transferring the property as a gift, your basis in the property will be his basis. Your “tax basis” is basically what you paid for the property plus the cost of any improvements you made to it. If you give the property to your friend and he later sells it, the capital gain is calculated by subtracting his basis (which was your basis) from the sales price. If your friend treats the home as his primary residence and meets certain conditions, then a portion of capital gains could be excluded. Currently, the first $250,000 in profit from the sale of a primary residence can be excluded ($500,000 for joint filers). While the tax laws could certainly be different in the future, another “gift” you can give your friend is good documentation of your tax basis in the property. That could save him a lot of research and hassle down the road.


“When did the annual gift exclusion change from $13,000 to $14,000? Did I miss it?” – Donald D., Volusia


The $14,000 annual gift exclusion amount was effective January 1st of 2013. If your gift exceeds $14,000 for any one recipient, don’t forget to file Form 709. Here’s a quick history of the annual gift exclusion amounts by year from $10,000 for 1997 – 2001; $11,000 for 2002 – 2005; $12,000 for 2006 – 2008; $13,000 for 2009 – 2012; and $14,000 for 2013. The annual gift exclusion amount is indexed for inflation, so it is likely to be higher in future years.


David D. Holland, a CERTIFIED FINANCIAL PLANNER™ practitioner, hosts a weekday radio show. He has also authored two books in his Confessions of a Financial Planner series. Holland offers investment advice through Holland Advisory Services, Inc., a registered investment adviser in Ormond Beach. He can be contacted at (386) 671-7526. Email your financial questions to