I wrote about required minimum distributions, or RMDs, on Thursday -- something that many people consider an annoying -- and possibly unfair -- part of retirement planning. Here's another way to look at them.
At 70½, the IRS requires that you start taking annual distributions from your tax-advantaged retirement savings or face a 50 percent penalty. The object of this law is to require all retirees to pay taxes on this money before they die. The RMD is generally spread over about 26 years. Or you can use the recalculation method that allows you to refigure your life expectancy every year. Using this method, you never totally spend down your account.
However, you calculate it, don't forget that Uncle Sam will get his share one way or other. If you wait until you're 70½ before you take anything out of your tax-advantaged accounts, you run the risk of bumping yourself into a higher tax bracket when you start taking the RMD. Another unpleasant possibility is that you'll die and whoever inherits your tax-advantaged savings will have to pay the taxes -- making it less of an inheritance than you would probably have liked to have left your children.
So instead of waiting until Uncle Sam forces you to take an RMD, a better idea might be to start spending the amount of the RMD earlier -- when you're younger and likely to enjoy it more.