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Guest columnist
Lee Eisenberg   Expert: Author Claire E. Toth, JD, MLT, CFP
Figuring out RMDs
It's easy to find advice about how to invest your money, but guidance on taking distributions is much more scarce.
Guest columnist

Withdrawing money from your IRA

You've spent years building up your individual retirement account, whether by rolling over employer plans when you change jobs or by making regular IRA contributions. You've had plenty of advice about making contributions along the way.

Once you're ready to start taking money out of your IRA, the advice gets a lot more scarce. Except with a Roth IRA, federal tax law requires you to eventually take distributions. The penalty for getting it wrong can be up to 50 percent of the distribution you should have taken, so there's a lot at stake here.

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But most people want to delay taking distributions for as long as they possibly can. The overriding reason is simple: Unless your IRA is funded largely with after-tax contributions (and that is rarely the case), withdrawing money from it is very expensive. Every tax-deductible dollar you put in, and every tax-deferred dollar of earnings, comes out as ordinary income at your top marginal rate. Given the choice, it costs far less in tax dollars to spend down a taxable account -- largely tax-free principal with earnings taxed at the lower capital gains level -- than it does to pull money out of an IRA. So rule No. 1 is to minimize your IRA withdrawals.

This isn't news to Uncle Sam. The government wants those tax dollars and typically forces you to begin taking required minimum distributions, or RMDs, starting at age 70½ -- or earlier, in the case of inherited IRAs.

Do you always have to take the RMD?
Not every retirement account requires that you take distributions beginning at age 70½. Roth IRAs don't have any lifetime distribution requirement at all. If you have a 401(k) with your current employer, are working after age 70½, and own less than 5 percent of the business, you don't have to take required minimum distributions on that account (though you must take them on your traditional IRAs). However, in most cases -- including SEP IRAs, SIMPLE plans and Keoghs -- you must begin taking withdrawals at age 70½, even if you continue to work and contribute to those plans.

If you inherit an IRA from someone other than your spouse -- a parent, a sibling or a life companion, for instance -- you must begin taking distributions the year after the original owner died. An IRA you inherit from your spouse is treated as if it were your own, with the usual rules applying, but nonspousal IRAs, also called Beneficiary Designation Account IRAs, or BDA-IRAs, have quirks, which we'll cover as they come up.

When to take your RMD
You have to take your required minimum distribution each year, beginning at age 70½. Your age is determined as of Dec. 31 the year you take the withdrawal. For your first required minimum distribution only, you have the option to wait until April 1 (not April 15) of the following year to take your first RMD, effectively doubling up in that year. Whether to take advantage of that one-time deferral depends on whether doubling up the required minimum distributions and the attendant tax liability will push you into a higher tax bracket, cause otherwise tax-free Social Security payments to become taxable or have other negative tax consequences. Most people elect to get the one-time deferral.

Next: Baffled? You're not alone.
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