Retirement Plan - Minimum Distribution

Minimum distributions must begin at age 70 1/2 for almost all retirement plans. The distributions are based on your life expectancy using IRS tables.

You may be sure you're going to make it to 100, but the IRS has other ideas. Don't mess with this rule because, if you are late in taking that first distribution, there is a 50 percent penalty on the amount of the required minimum distribution. That'll hurt worse than paying an early distribution penalty! The IRS wants to begin to collect taxes from you that you were able to defer all those years while you had the money growing.

You are required by law to start minimum distributions by April 1 of the year after you turn 70 1/2 but you will need to take your second distribution that year also. Receiving both payments in one year could bump you into a higher tax bracket. Consider taking the first payment by December 31 of the previous year instead.

Term Certain Method and Recalculation Method

There are two methods you can use to determine what your minimum distributions will be.

For those of you with a math phobia, get yourself an advisor to help wit the calculations. You have to choose between the term certain method and the recalculation method:

• Term certain method. The simplest to use, you value your account as of December 31 the year before distributions must begin and then figure out how much you need to take out. You will divide the account dollars by your life expectancy or the combined life expectancy of you and your beneficiary using IRS tables to determine those numbers.

• Recalculation method. This requires that you recalculate your life expectancy or the combined life expectancies of you and your beneficiary each year. This method, although more work for you, guarantees that you won't run out of money. The older you become, the longer the IRS tables say you may live. So your required distribution actually decreases with time.

Using either method is going to require that you recalculate the distribution amount each year because the value of your IRA changes. The decision of which method to use is complicated by your choice of beneficiaries, spousal or non-spousal. Again, I repeat: Get some advice because, once you choose, you are stuck with that distribution method.

If you have multiple IRAs, you must use the combined value to determine the minimum distribution. You need only use one account to withdraw funds form though. If you have not rolled over all of your qualified retirement plans into an IRA, you must make minimum distribution calculation for each plan.

This can be complicated stuff! You may need help in making your decision. At times, a trusted advisor is the only way to go. You may need to seek out a financial planner or a CPA to help. Also, the custodian of your IRA or retirement plans should be there to help and to remind you that you are getting close to age 70 and need to make some decisions.

So what if you have a pot of money that is not in a retirement plan? How long will it last? Here's a very simple calculation: If every year you only take out 4 to 5 percent and it is earning at least 6 percent, you'll always have money left in your pot. If your portfolio is returning over 10 percent a year, you can withdraw 8 percent a year. There are many calculators online as well as software available to help you make your money last, and your financial advisor can run annual calculations for you as well.