Know IRA rules when planning future

Dan Moisand for FloridaToday writes: QUESTION: I have money in a 401(k) plan at work and an traditional IRA. I turned 70½ this year and will retire in March. Is it true I don’t have to take any money from my retirement accounts until I retire?

The RMD is based on the value of the IRA on December 31, 2012. Failure to distribute enough for the year results in a penalty of a whopping 50 percent of the shortfall. That doesn’t mean you need to panic but… you may wish to hurry.

Why not panic this late in the year? Since you turned 70½ in 2013, you can wait as late as April 1, 2014 to take that first RMD from the IRA. So if you can’t get it done by 12/31/13, you can still avoid the penalty.

Why might you want to hurry? Good tax planning involves trying to put more taxable income from these distributions into the tax year with the lowest taxable income. You will have a 2014 RMD due out in 2014 from the IRA based on the IRA’s 12/31/13 value. Then a 2015 RMD based on the 12/31/14 value and so on every year. Only that first year allows waiting until April 1.

If you delay, you will have two RMDs coming from the IRA in 2014. If two RMDs, or anything else that arises in 2014, causes your 2014 income to be high enough to put you in a higher tax bracket, getting your 2013 RMD from your IRA on or before December 31, 2013 might be advantageous. On the other hand, if retiring causes your income to drop substantially, delaying into 2014 could be better.

On the 401(k), the rules look similar in that once you retire, you will be subject to an RMD each year based on the prior year-end value. And you may delay that first RMD to April 1 of the year after the year you stop working for that employer. After that first year, a new RMD is required each year from the 401(k).