Good planning can save taxes for those past 70 Tax Matters by David A. Katzman Recent turmoil in the financial markets has pushed thoughts of retirement out of the minds of many people. However, if you are nearing age 70 ½, you cannot simply put off retirement planning. At age 70 ½, you are required to begin taking at least minimum annual distributions from your traditional IRA—and paying taxes on that amount. If you have already retired from a company, you are also required to begin taking those retirement benefits. For those who turn 70 ½ during calendar year 2009, you have been given a one-year reprieve by the Internal Revenue Service (IRS) because of the dramatic drop in the financial markets. However, mandatory annual distributions are expected to resume in 2010. Because of the options available to you during your first withdrawal period, some tax planning is required if you wish to minimize your tax liability. The IRS requires you to begin taking required minimum distributions by April 1 of the year following the year in which you turned 70 ½--excluding 2009, when this requirement was temporarily suspended. Naturally, most taxpayers faced with the minimum annual withdrawal requirement think they should elect to wait until the latest possible date to withdraw the money. However, if you delay the distribution without first weighing the tax consequence, it could cost you money by pushing you into a higher tax bracket, creating more tax liabilities on your social security benefits or affecting your deductions, such as medical expenses, that have an adjusted-gross-income-based floor. The reason your decision could have a negative tax impact is because the extended deadline for taking a minimum distribution applies to the first year, but not subsequent years. This means, if you wait, you could be required to take two distributions in one year. Here’s an example. If you turned 70 ½ in May 2010, you must take your first distribution by April 1, 2011. However, you must also take your second distribution by December 31, 2011, so you will be forced to report the total of both distributions on your federal income tax return for 2011. Therefore, from a tax perspective, it might make more sense to take your first distribution by the end of 2010 and take your second distribution in 2011. This would allow you to spread your additional income over two tax returns. Whichever option you choose, do not fail to take a distribution. If you do not take the required distribution or you fail to withdraw enough, the IRS can impose a 50 percent penalty on the amount not withdrawn. How much must you withdraw? The required withdrawal amount is based on a percentage of your overall IRA balance and your life expectancy, as well as a few other variables. The IRS provides three tables, much like tax tables, to help you calculate your minimum distribution requirement. Most people will use Table III, the Uniform Lifetime Table. However, some circumstances could dictate using either Table I or Table II. While these tables dictate the amount you must take, when you take your first distribution will depend on your personal financial circumstances. A tax professional can help you determine if you should wait until the deadline to take your first distribution or if is makes more sense to spread that income over two tax periods. David A. Katzman is a certified public accountant licensed to practice in the State of Florida and the Commonwealth of Massachusetts. He is also a certified financial planner and certified senior advisor. Please consult your tax advisor for details and assistance in applying this general information to your specific situation.