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Andrew Horowitz: Know how to withdraw your retirement savings

Guest Commentary

Posted: April 3, 2012 2:00 a.m.
Updated: April 3, 2012 2:00 a.m.
 

When it comes time to start withdrawing the money you’ve spent a lifetime accumulating in your retirement portfolio, you want to ensure that you make the right decisions.

One decision that the government makes for you is requiring that you withdraw at least some of your funds annually, depending on the account type.

This is known as a required minimum distribution, or RMD, and it must be taken from your non-Roth retirement accounts by April 1 each year, starting the year after you turn age 70.5.

An RMD is generally determined using uniform life-expectancy tables that take into consideration the account owner’s and/or account beneficiary’s age and marital status, as well as his or her account balance(s) as of Dec. 31 of the year prior to the distribution year.

Here are some important considerations for those entering the “distribution phase” of their investing lives.

You can pick the account(s) you withdraw from ... If you have more than one of the same type of retirement account — such as multiple traditional IRAs — you can either take individual RMDs from each account or aggregate your total account values and withdraw this amount from one account. As long as your total RMD value is withdrawn, you will have satisfied the IRS requirement.

 Unless they are two types of accounts. If you own more than one type of account, such as an IRA and an employer-sponsored plan account, you’ll need to calculate your RMD for both types of accounts separately and take the proper amount from each.

 You may be able to defer if you’re still working. If you are still employed at age 70.5, you may be able to defer taking RMDs from your employer-sponsored plan until after you retire. You’ll need to check with your employer to see if this applies to you.

 The penalties can be severe for failing to comply. If you fail to take your full RMD, the IRS may assess an excise tax of up to 50 percent on the amount you should have withdrawn — and you’ll still have to take the distribution.

n Taxes are still due upon withdrawal. You will probably face a full or partial tax bite for your distributions, depending on whether your traditional IRA was funded with nondeductible contributions. Note also that the amount you are required to withdraw may bump you up into a higher tax bracket.

n You can donate your RMDs to charity. IRA owners can donate up to $100,000 of their annual distributions to qualified charities and have it count toward their RMD. If you’ve inherited an IRA, these donations are allowable as long as you are older than age 70 1/2.

 Roth accounts are exempt. If you own a Roth IRA or Roth 401(k), you don’t need to take an RMD. However, note that any distributions taken from a Roth do not count toward your RMD amount and that restrictions apply to the beneficiaries of inherited Roth accounts.

For more information, everything you need to know about retirement account RMDs can be found in IRS Publication 590 (http://www.irs.gov/pub/irs-pdf/p590.pdf), including the life-expectancy tables you’ll need to figure out your RMD amount. Your financial and tax professionals can also help you determine your RMD.

The author(s) and/or publication are neither employees of nor affiliated with Morgan Stanley Smith Barney LLC (“MSSB”). By providing this third party publication, we are not implying an affiliation, sponsorship, endorsement, approval, investigation, verification or monitoring by MSSB of any information contained in the publication.

The opinions expressed by the authors are solely their own and do not necessarily reflect those of MSSB or The Signal. The information and data in the article or publication has been obtained from sources outside of MSSB, and MSSB makes no representations or guarantees as to the accuracy or completeness of information or data from sources outside of MSSB. Neither the information provided nor any opinion expressed constitutes a solicitation by MSSB with respect to the purchase or sale of any security, investment, strategy or product that may be mentioned. Article written by McGraw Hill and provided courtesy of Morgan Stanley Smith Barney Financial Advisor Andrew Horowitz. 

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