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October 28 , 2007 --I have a retirement plan, but I am not ready to start taking money out of it. Are there required distributions I need to take?

An owner of a traditional IRA must start taking required minimum distributions (“RMD”) from their IRA by April 1 of the year following the year in which they attain age 70 1/2. However, distributions need not be taken from Roth IRAs at any age. A participant in a qualified retirement plan must begin taking distributions by April 1 of the calendar year following the later of the year in which he: (a) reaches age 70 1/2, or (b) retires (except for 5% owners, who are subject to the same rules as IRA owners). However, a qualified plan may provide that they required beginning date for all employees (including non-5% owners) is April 1 of the calendar year following the calendar year in which the employees attain age 70 ½.

In general, the first distribution year is the year in which the IRA owner (or a qualified plan participant who is a 5% owner) attains age 70 ½. The first distribution year for a qualified plan participant who is not a 5% owner is the later of the year in which he attains age 70 ½ or retires. However, taxpayers who attain age 70 ½ in 2007 may postpone their required beginning date to April 1, 2008 to begin making RMDs. But if they do that, they must still take a distribution for the second distribution year, thus resulting in two distributions in a single year. They will also have to begin distributions from qualified plans in which they participate.

There are some instances where taking both distributions in the second year is advantageous because you may fall into a lower tax bracket in the second year and there is always the advantage of tax deferral and paying the tax on this income at a later date. The downfall of this approach is that this could result in a swollen adjusted gross income (AGI) and may further limit deductions with an AGI floor.

The RMD for each year from IRAs or individual accounts under a qualified defined contribution plan is found by dividing the account balance as of the end of the preceding year by the life expectancy factor from a uniform table. This table is used in all cases, except where the account’s designated beneficiary is the account owner’s spouse and is more than 10 year younger than the owner, in which case, a joint life and last survivor life expectancy table is used.

You should keep in mind that if you are required to take a minimum distribution and do not, you could face a 50% penalty on the difference between the amount that should have been taken and the amount actually taken.

Planning considerations

For tax year 2007, a $100,000 per spouse direct distribution to most charities from an IRA account can count as part of the RMD even though such a distribution is excluded from adjusted gross income. Additionally, because a distribution is not includable in gross income, it will not increase AGI for purposes of the phase out of itemized deductions, personal exemptions, or any other deduction, exclusion, or tax credit that is limited or lost completely when AGI reaches certain specified levels. An excluded distribution cannot be deducted as a charitable contribution.

In some cases, it might make sense to take distributions that are larger than the minimum. It might be advisable to do this where the individual otherwise has very low income and the distribution could be completely shielded from (1) federal tax by the individual’s standard deduction (or itemized deductions) and personal exemption, and (2) state tax by similar tax breaks and/or special retirement exclusions that some states offer. (Colorado offers a pension and annuity subtraction of $20,000 starting at age 55, increasing to $24,000 at age 65.) While the beneficiaries would lose some of the continued shelter, they would not be taxed at their potentially higher brackets on the increased amounts withdrawn by the account owner tax-free.

In general, it is a good idea for a taxpayer to take the minimum amount if they can afford to limit distributions to that extent. Doing so generally results in a lower tax bill, can extend the tax shelter aspect of the IRA or other retirement vehicle for the benefit of the family members, and can ultimately result in larger payouts for beneficiaries.

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