Money Matters: Investor seeks advice on delaying IRA distributions | Raleigh News & Observer

Q. Since the market was down so much in January and February, I started wondering how people protect themselves from losing money when they have to take their required minimum distribution from their IRA. I will be 70 1/2 in five years, so I’m thinking of transferring all my 401k to IRA accounts while the market is back up, keep some of it in an IRA money market account or IRA CDs, so when time comes I can withdraw the money without worrying about the market being up or down. Someone said you can delay your first distribution, is this a good idea if the market is down? Another friend said not to worry about it because if the market is really down the government will waive any required distributions for those years. Do you think my idea of holding cash makes sense or is this something about which I should just not worry. Also, will the IRS tell me the amount I need to take out each year and when?

A. In late 2008 the Worker, Retiree & Employer Recovery Act was signed into law waiving any required minimum distribution (RMD) for one year only, 2009. I wouldn’t make any future plans based on this onetime waiver. Your plan to move some of your 401k/IRA monies into more conservative investments as you get closer to your RMD age makes sense to me. You could estimate your RMDs and begin moving small amounts into CDs, ultra short-term bonds or money markets when the market reaches a high point until you have accumulated an amount equal to three or four years of RMDs. Once you begin your RMDs and the amount in the conservative investments decreases, add to them when the market is high. You can take your RMD any time during the year either in a lump sum or in small distributions. If the market is up, you may want to sell some of your more aggressive holdings and take your RMD sooner than later in the year.

You can delay taking your first RMD. Age 70 1/2 or April 1^st of the year following age 70 ½ is when required minimum distributions (RMDs) begin. If you wait until April 1^st of the following year, two distributions will be required that year. The one for the previous year must come out by April 1^st and the second must come out by December 31^st. RMD is the amount an owner of an IRA is obligated to take out; ordinary income taxes are generally owed on this amount. The RMD is calculated by dividing the appropriate account balances as of December 31st of the preceding year by the corresponding life expectancy from the IRS life expectancy tables. If your spouse is more than 10 years younger you use the joint life expectancy table, all others will use the IRS uniform life expectancy table. Any RMD not taken is subject to a hefty 50 percent IRS penalty. All banks, brokerage houses, mutual funds and other retirement plan providers have to report minimum required distribution amounts to both the taxpayer and the IRS. You can take your RMD from one or several accounts as long as the amount taken is based on the total of all applicable accounts.

Since you have several years before your RMDs begin you may want to seek the advice of a tax or financial professional and determine if it makes sense to convert some or all of your 401k/IRA to a Roth IRA. Under current law, Roth IRAs are not subject to RMDs during the owner’s lifetime.