COLUMN-How to cope with dreaded retirement distributions


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By Mark Miller

CHICAGO, Oct 11 (Reuters) - There's a reason why 401(k) andindividual retirement accounts are called "tax deferred." Youpay no taxes while you're accumulating savings, but Uncle Samultimately gets his bite when funds are withdrawn. And to makesure the meal gets started on time, you'll face though thedreaded required minimum distribution (RMD).

RMDs must be taken from IRAs starting in the year you turn70.5 - and from 401(k)s at the same age, unless you're stillworking for the employer that sponsors the plan. They exist tomake sure the tax benefits of these accounts don't extendindefinitely - and that you start using these assets, and startpaying taxes, in retirement.

"RMDs are a double straitjacket," says Christine Fahlund, senior financial planner and vice president of T. RowePrice Investment Services. "First, the government requires youto pull money out of your accounts when you don't necessarilywant to, and then you're required to pay taxes on thewithdrawals."

Like it or not, this is the time of year to think aboutRMDs, since in most cases they must be taken by Dec. 31. Andit's important to get this right: Failure to take the correctdistribution results in an onerous 50 percent tax - plusinterest - on any required withdrawals you fail to take.

RMDS can boost other expenses, too. Since distributionscount as ordinary income, they can push you into a higher taxbracket. They also can trigger higher taxes on Social Securitybenefits and substantial high-income surcharges on Medicarepremiums.

Here are year-end tips from the pros on effective RMDmanagement.


RMDs must be calculated for each account you own by dividingthe prior Dec. 31 balance with a life expectancy factor that youcan find in IRS Publication 590 ().Often, your account provider will calculate RMDs for you - butthe final responsibility is yours. FINRA, the financial servicesself-regulatory agency, offers a calculator(), and the IRS offers worksheets() to help calculate RMDs.

RMDs must be taken by year-end, with one exception. If youturn 70.5 this year, you have until next April 1 to take your2013 RMD. However, doing that means you'll be taking twodistributions in 2014 - which could have a significant impact onyour income taxes.


Although RMDs are calculated for each IRA you own, you don'thave to take a separate distribution from every account. Youcould total up your RMDs and take it all from one IRA - one thatis a poor performer, perhaps, or one that will help yourebalance an account that might be overweight in equitiesagainst your overall allocation plan.

"It's a great idea to use RMDs to restore balance to yourportfolio," says Christine Benz, director of personal finance atMorningstar. "We've seen a tremendous run in stocks, recentlosses notwithstanding, so it's a good bet that many retirees'equity allocations are above their target ranges."

With 401(k)s or other workplace plans, the RMD must be takenfrom each individual account you own. If you've left a trail of401(k)s at various jobs over the years, that can be a chore -and a good argument for consolidation, argues Fahlund. "Ifyou're just getting into the world of RMDs, it's a good time toconsolidate your 401(k)s and IRAs," she says. "Minimize thenumber of accounts you have, so you can keep track of them moreeasily."


It's bad enough that RMDs may force you to sell assets youmight prefer to hold. But RMDs also can trigger an increase inincome taxes if they push you into a higher bracket.

Another bummer: RMDs can mean a bigger tax on SocialSecurity benefits, which are taxed using a complex "provisionalincome" formula that is determined by adding together youradjusted gross income, tax-exempt income and half your SocialSecurity benefit.

If you're over age 70.5, options for minimizing RMDs arefew. One that is available - at least this year - is thequalified charitable distribution (QCD), which lets you makecash donations up to $100,000 to IRS-approved public charitiesdirect from an IRA. (QDCs from workplace plans aren't allowed.)The gifts can be counted toward an RMD and are excluded fromyour taxable income.

This tax shelter has been on the congressional choppingblock for some time and isn't expected to be extended for 2014."It's the most interesting option this year, if you're in aposition where you don't need the money yourself and you'recharitably minded," says Jeremy S. Elliott, managing director atNational Financial Partners.

Another option is converting IRAs assets to an after-taxRoth IRA. You'll owe income tax on the money you switch into theaccount in the year of the conversion, but you won't need totake RMDs in future years (though any beneficiaries would needto take RMDs down the road).

Finally, consider accelerating drawdowns from tax-deferredaccounts before you enter the world of RMDs. Savings can bewithdrawn without penalty from tax-qualified accounts after youturn 59. That will leave you with smaller tax-deferred accountsdown the road - hence smaller RMDs.

Bill Meyer, co-founder of,suggests taking distributions as large as possible so long asthey don't push income into a higher tax bracket. "The idea issimple, he says. "If you reduce your RMDs down the road, youwill have more money to spend in retirement."

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