10 Strategies For IRA Withdrawals

You’re required to take money out of retirement accounts when you turn 70½, but you can minimize the tax bite.

- Kimberly Lankford

When you invest in an IRA, 401(k) or other tax-deferred plan, you make a deal with Uncle Sam: You get years of tax-deferred growth, but you have to start taking money out—and give a cut to the IRS—after you turn age 70½. The calculations can be complicated, and the penalties for missteps are steep: If you don’t take the required minimum distribution by the deadline each year, you’ll pay a penalty of 50% of the amount you should have withdrawn.

The prospect of taking RMDs and facing the tax bill can be daunting, but there are a number of strategies you can use to minimize taxes, make the most of your investments and avoid costly mistakes.

1 Calculate the amount of your withdrawals.

Your RMDs are based on the balance in your accounts as of December 31 of the previous year, divided by a life expectancy factor based on your age. Most people use the Uniform Lifetime table (Table III) in Appendix B of IRS Publication 590-B (available at www.irs.gov). If your spouse is more than 10 years younger than you and is your sole beneficiary, use Table II, the Joint Life and Last Survivor table, for the life expectancy factor.

Your IRA or 401(k) administrator can usually help with the calculations, or you can use our RMD calculator at Kiplinger.com to determine the amount.

2 Time it right.

You usually have to take your annual RMD by December 31, but you have until April 1 of the year after you turn 70½ to take your first required withdrawal. However, delaying that first withdrawal means you’ll have to take two RMDs in one year, which could have a ripple effect on other areas of your finances. The extra income could bump you into a higher tax bracket, make you subject to the Medicare high-income surcharge or cause more of your Social Security benefits to be taxable.

3 Pick the best accounts for RMDs.