Tuesday, September 28, 2010

Tuesday Q&A Series – Required Minimum Distributions

This week’s question comes from Mike who is turning 70.5 this year, and he has questions over when he needs to take a distribution from his retirement account – especially with the changes that were made in 2009.

Q. I just received your latest Tax and Business Alert. On page 4 is a brief article about Minimum Required Distributions from IRAs and defined contribution plans. I think that it says in the example that a person who reached 70.5 in 2009 is required to take a Required Minimum Distribution (RMD) by the end of 2010. If that is the case, and I reached 70.5 in 2010, then could I postpone the first distribution until the end of 2011?

This is a question that would not normally come up, but with the changes that were made for 2009 only, I can understand the confusion.

In any year other than 2009, if you turn 70.5, you must take your first distribution by April 1 of the following year. This one-time caveat is to allow people to be notified and understand that they must take the distribution. If this happens though, you must take two distributions – one for the 70.5 year and one for the current year.

At Rollins Financial, we always instruct clients to take a distribution in the year that they turn 70.5. This gets the first distribution out of the way, and it also makes sure that two distributions are not necessary in one year thus creating even more taxable income.

So where is the confusion? Well, at the end of 2008 Congress decided to change the law for 2009 as to not require a distribution. Thus for anyone that was 70.5 or older in 2009 there was not a mandatory distribution.

If someone turned 70.5 in 2009, they were allowed to “skip” the first distribution, if they wished, so the first RMD that they must take would be by December 31, 2010.

For Mike, since he turns 70.5 in 2010, he must take a RMD by April 1, 2011, but once again, we recommend taking it before the end of 2010.

**Note** - At Rollins Financial, we work with our custodians (Schwab and Fidelity) to check the RMD and status of distributions for our clients. For those clients that do not take monthly distributions that meet the RMD, we send out distribution forms around Thanksgiving. This gives the client ample time to understand what is going on and most like the added “Christmas money” for presents.

Mike, I hope the answer above has cleared up some of the confusion that was caused by 2009, and we certainly thank you for your question.

We encourage our clients and readers to send us questions for our Tuesday Q&A series at contact@rollinsfinancial.com. And as always, we hope you will keep Rollins Financial in mind when seeking professional advice on financial planning and investing.

Best regards,
Robby Schultz

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