Take your Required Minimum Distribution – RMD

In only a week the smell of turkey will be filling most American households. Unfortunately, unlike last year, this year you will have to take a distribution from your retirement account (IRA and possibly other retirement accounts) if you are 70 1/2 or older. This may also apply if you have inherited an IRA.

Normally an every year requirement, congress suspended Required Minimum Distributions in 2009 because of ravaged retirement plans. This makes sense and to understand why, you have to understand the purpose of RMDs. Did you know:

RMDs dictate when tax sheltered retirement plans should end. This is because congress did not intend on allowing retirement plans to be major multi-generational wealth transfer vehicles. With the concept of the stretch IRA you can push this to the limit, but still have to contend with a required annual distribution.

If you are an original IRA owner, and DO NOT have a spouse more than 10 year younger than you, you should use the Uniform Lifetime Table provided by the IRS to calculate your RMD. There is a joint table if your spouse is more than 10 years younger. For those non-spouses who have inherited IRAs, you will use the Single life table and after your first RMD simply subtract 1 from the factor.

The majority of clients have asked the question “do I have to take an RMD this year”? While congress could certainly still pass legislation, it seems as if another RMD waiver is unlikely because of the markets rebound in 2010.

Planning tip for first IRA owners with RMDs in their first year.

• The year you turn 70 1/2 is the first year you are required to take an RMD. That year you are allowed to defer taking the distribution until April 1st of the following year. This is like an extended grace period. You should know that if you do defer your RMD into the next year, you will have to take 2 RMDs that year. This may affect things like the taxation of your social security benefits in a negative manner. Efficient tax planning may not warrant waiting until April 1st to take that first RMD. This could go the other way as well.

With the holiday season fast approaching don’t forget to take your RMD from your IRA or other retirement plan. If you are an employee with a employer sponsored plan like a 401k, you may not have to take any RMDs until you stop working, as long as your no more than a 5% owner of that company.

Happy RMDs and Merry tax season.