Meeting your obligations and finding some opportunities

After you turn 70 1/2, the IRS requires you to withdraw some of the 
money in your retirement savings accounts each year. These withdrawals 
are officially called Required Minimum Distributions (RMDs).
While you never have to make withdrawals from a Roth IRA, you must take 
annual RMDs from traditional, SEP and SIMPLE IRAs, pension and 
profit-sharing plans and 401(k), 403(b) and 457 retirement plans 
annually past a certain age. If you don't, severe financial penalties 
await.
If you are still working as an employee at age 70 1/2, you don't have 
to take RMDs from a profit-sharing plan, a pension plan, or a 401(k), 
403(b) or 457 plan. Your initial RMDs from these accounts will only be 
required after you retire. However, you must take RMDs from these types 
of accounts if you own 5 percent or more of a business sponsoring such 
a retirement plan.
You must take RMDs from IRAs after you turn 70 1/2 regardless of 
whether you are still working or not.
The annual deadline is Dec. 31, right? Yes, with one notable exception. 
The IRS gives you 15 months instead of 12 to take your first RMD.
Your first one must be taken in the calendar year after you turn 70 
1/2. So if you turned 70 1/2 in 2011, you can take your initial RMD any 
time before April 1, 2013. However, if you put off your first RMD until 
next year you will still need to take your second RMD by Dec. 31, 2013.
Calculating RMDs can be complicated. You probably have more than one 
retirement savings account. You may have several. So this gets rather 
intricate.
- Multiple IRAs. Should you have more than one traditional, SEP or 
SIMPLE IRA, the annual RMDs for these accounts must be calculated 
separately. However, the IRS gives you some leeway about how to 
withdraw the money. You can withdraw 100 percent of your total yearly 
RMD amounts from just one IRA, or you can withdraw equal or unequal 
portions from each of the IRAs you own.
- 401(k)s and other qualified retirement plans. A separate RMD must be 
calculated for each qualified retirement plan to which you have 
contributed. These RMD amounts must be paid out separately from the 
RMD(s) for your IRA(s).
- Inherited IRAs. The same applies; a separate RMD must be calculated 
for each inherited IRA you have, and these RMD amounts must be paid out 
separately from RMD(s) for your other IRA(s).
This is why you should talk to your financial or tax advisor about your 
RMDs. It is really important to have your advisor review all of your 
retirement accounts to make sure you fulfill your RMD obligation. If 
you skip an RMD or withdraw less than what you should have, the IRS 
will find out and hit you with a stiff penalty: you will have to pay 50 
  percent of the amount not withdrawn.
Are RMDs taxable? Yes, the withdrawn amounts are characterized as 
taxable income under the Internal Revenue Code. Should you be 
wondering, RMD amounts can't be rolled over into other tax-deferred 
accounts and excess RMD amounts can't be forwarded to apply toward next 
year's RMDs.
What if you don't need the money? If you are wealthy, you may come to 
see RMDs as an annual financial nuisance, but the withdrawal amounts 
may be redirected toward opportunities. While putting the money into a 
savings account or a CD is the usual route, there are other options 
with potentially better yields or objectives. That RMD amount could be 
used to:
- Start a grandchild's education fund.
- Fund a long term care insurance policy.
- Leverage your estate using life insurance.
- Diversify your portfolio through investment into stock market 
alternatives.
There are all kinds of things you could do with the money. The 
withdrawn funds could be linked to a new purpose.
So to recap, be vigilant and timely when it comes to calculating and 
making your RMD. Have a tax or financial professional help you, and 
have a conversation about the destiny of that money.
Brad Ledwith is a certified financial planner and runs his own wealth 
management firm in Morgan Hill. He is a registered representative with 
and offers securities through LPL Financial, member FINRA/SIPC. CA Lic. 
OC69547. If you have financial questions you would like to have 
answered in this column in the future, email [email protected].