Accounting for Required Minimum Distributions Know the Rules to Avoid IRS Penalties With all the focus on securing enough money for retirement, it is easy to forget that many retirees have the opposite dilemma. You may already have access to enough-or even more than enough-assets to fund your lifestyle during retirement. This may be a happy scenario, but it still comes with decisions that must be made about the money in your retirement accounts. Even if you do not need the money, you are required to take minimum distributions from your non-Roth retirement plans by April 1 the year after you turn age 70½ In fact, if you do not make your required minimum distribution in a timely manner, the tax consequences are harsh. In addition to owing regular income tax on your required distribution amount, you'll owe a 50% penalty on the amount you failed to properly withdraw. For example, if you were required to withdraw $10,000, but you only withdrew $5,000, you would be hit with a $2,500 penalty in addition to the tax liability on your required distribution. How Much Should You Withdraw? The minimum distribution is based on the total value of all of your eligible tax-deferred retirement savings plans as of the last day of the previous year. For example, your minimum distribution for 2006 would be based on the total value of your eligible accounts as of December 31, 2005. That amount is divided by a "factor" determined by the IRS and based on your life expectancy. In other words, the minimum distribution amount will change annually and must be calculated much like your income taxes. In Practice Jane Investor turned 72 in 2006. At the end of 2005, she had $325,000 in tax-deferred retirement accounts across a 401k and a Traditional IRA. The IRS Uniform Lifetime Table indicates her life expectancy factor is 25.6. Therefore, her 2006 required minimum distribution is $12,695.31 (325,000/25.6). She can make the withdrawal from either the 401k or IRA or both. Please note: If an account owner's beneficiary is a spouse who is 10 years or more younger, the IRS factor is determined by a different table and changes the calculation. Generally, you must take your distribution by December 31 of each year. However, your first year of eligibility is a little trickier. If you turned 70 in 2006, for example, but you turn 70½ in 2007, you can delay your first minimum distribution until April 1, 2008. If you wait, you will need to take two years worth of distributions in 2008, however, which could put you in a higher tax bracket. Two distributions are required because you need to take a minimum distribution for 2007 and 2008. Of course, once you've withdrawn the mandatory amount and paid the necessary taxes, you can use the funds any way you like. This means you can reinvest them, outside your tax-deferred retirement plan, if you would like to keep the money for your future needs. Managing Your Mandatory Distributions Your tax-deferred retirement savings plans (employer-sponsored plans and Traditional IRAs) are not intended to be tax free, which is why the federal government established minimum distribution requirements. However, there are ways to delay or manage these distributions. One way is to keep working. If you are a retirement plan participant, who is not a 5% or greater owner in the company, generally you are not required to make withdrawals from company-sponsored plans until you retire, even if that is after age 70½. You should check with your plan administrator, before you reach age 70½, for the specific regulations governing your plan. If your tax-deferred retirement savings is in a Traditional IRA, you can also choose a much younger beneficiary, or more than one beneficiary, to inherit your account. For example, if you leave your IRA to more than one person and divide the account accordingly, each beneficiary can take minimum distributions based on their specific age. The annual withdrawals will be much smaller for younger beneficiaries allowing more dollars to remain invested for growth, compounding tax-deferred over time. As you can see, managing minimum distributions from your tax-deferred retirement savings accounts can be complicated. A qualified financial professional can help you determine options that work for your family. If you need a referral to a financial professional, Russell can help. Please submit a request. Fund objectives, risks, charges, and expenses should be carefully considered before investing. A prospectus containing this and other important information can be obtained by calling (866) 676-7680 or by visiting this page on russell.com. Please read the prospectus carefully before investing. Copyright © Russell Investments 2007. All rights reserved. This material is proprietary and may not be reproduced, transferred, or distributed in any form without prior written permission from Russell Investments. It is delivered on an as is basis without warranty. Russell Investment Group is a Washington, USA corporation, which operates through subsidiaries worldwide, including Russell Investments, and is a subsidiary of The Northwestern Mutual Life Insurance Company. Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional. Securities products and services offered through Russell Financial Services, Inc. (formerly Russell Fund Distributors, Inc.), member FINRA, part of Russell Investments. For information on the Financial Industry Regulatory Authority, go to www.finra.org. RFD 07-6347. First used: January 2007.			RELATED Articles Receiving Retirement Plan Payments Tax Strategies Introduction to IRAs Printer friendly version of this page Send feedback or comments Site Search

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