Removing Money From Retirement Accounts

Year end brings many questions about the nuiances of removing money from IRA?s ?those Required Minimum Distributions (RMD?s). This article is key for people over age 70 ½ or for children who care about their ultimate inheritance and can counsel parents with multiple accounts, which lend themselves to multiple mistakes!

For those readers not familiar with RMD?s, the government requires that once you turn 70 1/2, you must withdraw annually from most retirement type of plans ? and pay those taxes on the distribution. Calculations are done each year based on your balances and life expectancy (or joint expectancies with a spouse) ? but there are some creative ways to work these distributions and that?s where the questions come in!

Persons working over age 70 ½ with multiple IRA?s, ESOP?s (employer stock option plan), and 401K?s typically ask a few questions about their IRA and RMD?s. First, since they are still working, do they have to count his current company 401K as part of the money on which RMD?s must be figured? The good news is no - - unless the person is a 5%+ owner in the business, or unless he retires. One strategy we?ve used for people with 401K?s from previous employers is to roll them to the current 401K, which allows the worker to exempt these funds from the RMD calculation. We had a case this year of someone not implementing this strategy and it cost them $2,000 in taxes to keep the money in the old 401K. There are trade-off?s to the 401K transfer, but it is something to consider and shows the value of hiring someone to oversee the entire financial picture, instead of just manage an account or two?something we highly recommend you do.

Second, wouldn?t it be wise to delay taking distribution as long as possible and take this first distribution out in 2008, since the tax laws allow such a move? Normally, I would be in agreement to keep money compounding as long as possible. Although, your first RMD is figured in the year you reach 70 ½, you can wait until April 1st of the following year to actually pay it, allowing money to compound longer. It seems logical to wait to pay. However, you would have to take out TWO distributions in 2008 (2007?s and 2008?s). Since the distribution amounts might be of reasonable size, perhaps taking two distributions in one year might push you into a higher tax bracket - which might not outweigh any extra investment compounding. To muddy the water even more, if you are juggling the possibility of retiring in 2008, which would lower your tax bracket, it might be better to delay and take two distributions in the year of retirement. Needless to say, the decision of doubling up on RMD?s in 2008 isn?t quite so easy.

The third question has to do with the mechanics of withdrawing funds ? is there an easier way rather than taking little pieces out of so many areas? It is perfectly OK, even preferable at times, to take the distribution from one place, as long as you figure all accounts when performing the RMD calculation. Always consider removing money first from the lowest yielding investment, which leaves other investments to compound at higher rates.

So it goes, life and finances are rarely simple. This is just another reminder that most financial matters are inter-connected. When it comes to finances, it?s usually preferable to seek Financial Insight!