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 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

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To calculate your required minimum distribution for any year, start with the value of all your IRAs aggregated Dec. 31 of the previous year. Then divide it by a predetermined life expectancy, which can vary. The most usual life expectancy is that of yourself and a hypothetical person 10 years your junior. (Bankrate's required minimum distribution calculator can help you get started.)

There are two exceptions to this rule. First, if your spouse is more than 10 years your junior and is your primary beneficiary, the divisor is the actual joint life expectancy of you and your spouse. Second, with a BDA-IRA, you start with your individual life expectancy for the year in which you take the first distribution and then reduce that number by one each year thereafter. This is not quite the same as your actual life expectancy, because every year you live, your future life expectancy decreases by slightly less than a year.

Baffled? You're not alone.

Calculating RMDs under various scenarios
 Let's illustrate with some numbers. Assume we have a 70½-year-old, "Ned," taking a withdrawal from a \$1 million IRA. • If we calculate his RMD under the general rule, the joint life expectancy of Ned and a 60-year-old is 27.4 years, making the RMD \$36,496. • Instead, let's assume Ned has a spouse who is only 50. In that case, the joint life expectancy is 35.1 years, making the RMD only \$28,490. • On the other hand, if Ned inherited the IRA from his brother, the first year's single-life expectancy is 16, creating an RMD of \$62,500.

One more twist: As already mentioned, you have the option of taking your first required minimum distribution the year after you turn 70½. In that case, to calculate your RMD for the second year, subtract your first year's RMD from your IRA's Dec. 31 value. Otherwise, you are overstating your second required minimum distribution -- it should be as if you had taken the first distribution on time.

As long as you are at least 59½, you can take money out of your IRA penalty-free. Despite (and sometimes because of) the high cost of withdrawing, there are times when you may want to take out more than the required minimum distribution or take it out before you are required.

First, you may need the money in your IRA to support yourself, particularly if all of your savings and investments are in retirement accounts. In this case, you don't have much choice -- you put the money aside to support yourself after retirement, so do so.

Second, those who retire before age 70½ often find themselves in some very low tax-paying years. That's because they're tapping their taxable assets to support themselves. Because most dividends and capital gains currently have maximum federal tax rates of 15 percent, there may be little tax liability relative to cash flow. In that situation, some people find they can't really use their deductions for property taxes, charitable donations and the like, so they would likely just take the standard deduction.

If you find yourself in that sort of low-tax situation, you might want to convert some of your IRA assets to a Roth IRA. This can provide taxable income to absorb deductions while moving future income off the tax grid.

Third, if you are at least 70½ this year (even if you won't be 70½ by the end of the year), you can donate up to \$100,000 directly from your IRA to charity. The donation will count toward your required minimum distribution but will not increase your income -- so therefore will not generate taxes or a deduction. If you don't need your RMD to live on, this is a great way to meet any charitable obligation while likely lowering your tax bill. At present, the ability to use this giving technique expires at the end of 2007, so take advantage of it while you can.

 Bankrate.com's corrections policy -- Posted: Nov. 15, 2007

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