Q. I have three IRAs with three different custodians. I will be 59 1/2 later this year. How do I decide what account I should take the required minimum distributions from, and are there any rules I should know?
A. Of course there are rules on the topic, but you may have some time before you have to worry about some of them
For starters, account owners must start taking Required Minimum Distributions (RMD) from traditional IRAs at 70 1/2.
You may be confusing that with what happens at age 59 1/2, which is when you can take distributions from a traditional IRA without facing a 10 percent early distribution penalty, said Michael Maye, a certified financial planner with MJM Financial in Gillette.
When you do hit 70 1/2, the rules are very specific.
“The IRS rule for traditional IRAs is the first distribution must be taken by April 1 the year after a person turns 70 1/2 years old,” Maye said.
But he generally recommends clients take their first RMD by Dec. 31 of the year they turn 70 1/2.
“If an individual actually waits to take their distribution till the year after they turn 70 1/2 years old, they will actually have two IRA distributions the first year as they will be required to take another RMD distribution by December the same year,” he said.
So even though you’re not required to take a distribution yet, Maye said there may be reasons why you want to.
“For example if the reader is retired and takes distributions before 70 1/2, it may allow the reader to defer their pension payment or Social Security payment until they reach their maximum level,” he said.
He said choosing when to take distributions should be part of an overall planning strategy.
As for which account to take the distribution from? The IRS really doesn’t care.
“For simplicity, you may want to consolidate your IRAs from three custodians down to one custodian,” Maye said. “The advantage is the custodian can calculate the RMD amount for you and simplify the RMD process.”
If you don’t want to take RMDs at all, you have some options.
“The IRS now provides an opportunity to convert traditional IRAs to Roth IRAs without income limitations,” said Jill Williams, a certified financial planner with the MetLife Premier Client Group in Montclair. “Roth IRAs are exempt from required minimum distributions, so not only can you continue to defer distributions beyond 70 ½, but the potential growth of the account value can now be withdrawn income tax-free as well.”
If you decide to convert to a Roth, you’ll have to pay ordinary income tax on 100 percent of the IRA funds in the year you convert them, so careful planning is required, she said.
“If you have enough time—10 years before you take distributions is typically a good rule of thumb—you may benefit from implementing a conversion strategy,” Williams said.
Williams said a span of at least 10 years provides enough time to leverage a good retirement income strategy, so the sooner you implement a plan, the better chance you’ll have to enjoy the retirement you’ve dreamed of.
Because a Roth conversion has lots of tax consequences, be sure to work with a pro before you make the move.
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