Ways to make RMDs less painful

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If you’re older than 70, now is the time to consider this year’s required minimum distributions, or RMDs, on your IRA and other retirement accounts.

Everyone born before July 1, 1939, who has a non-Roth retirement account has to take their RMD this year. Last year, in the midst of the economic downturn, they were waived.

Here are a couple of retirement planning suggestions for minimizing the pain from Rebecca Pavese, a certified public accountant and manager of Palisades Hudson Financial Group’s national tax practice in Atlanta.

Take the distribution as securities rather than cash. You own a stock in your IRA that you feel in your bones will ultimately increase in value. Tell your custodian to move the requisite number of shares into a taxable account. Pay the required tax with other cash and let the shares appreciate. When you finally sell them — provided you have held them for a year — you’ll pay the capital gains rate, which even if the government raises, will be lower than the ordinary income tax rates you’d pay if you left the gain in your IRA. “This can work especially well if you think the security is undervalued and you don’t need the cash,” Pavese says.

Withhold money from your RMD to pay your income taxes. If you pay quarterly estimated federal income taxes, you can direct your plan custodian to withhold income tax from your RMD distribution. For instance, let’s say you owe $10,000 in 2010 tax. Normally, you’d have to make four payments of $2,500, but if you’re getting a $10,000 RMD, you can have the custodian withhold $10,000 in tax from it. Since it’s withholding, it can all come at the end instead of throughout the year — and you won’t pay a penalty for underpayment of estimated tax.

“You get to hold onto and invest your money longer,” Pavese says.