Ask Joe Weider

Dear Carrie: I'm turning 70 in a few months and know I'll be forced to withdraw money from my retirement accounts. How does that work and are there some special rules I need to know about? —A Reader

Dear Reader: I think of reaching age 70 as an achievement, so first of all, congratulations. You probably have a lot to celebrate. However, while you're blowing out the candles, the IRS is lying in wait, ready to collect some revenue.

That's because you must begin taking a yearly Required Minimum Distribution (RMD) from your retirement accounts once you reach age 701/2. This includes most of your accounts — traditional, SEP and SIMPLE IRAs, and 401(k)s once you retire. (You can delay taking an RMD from your 401(k) if you're still employed.) If you have a Roth IRA or Roth 401(k), you're in the clear. There is no RMD for a Roth.

While the concept of a RMD is simple, there are definitely certain rules you need to be aware of to avoid some pretty hefty penalties. Here are a few things to keep in mind.

—Don't be late: Technically, you have until the year AFTER you turn 701/2 to take your first RMD. The IRS gives you the choice of taking it either by the end of the year you turn 701/2 or by April 1 of the year following.

For instance, if your 70th birthday is on December 1, 2012, you turn 701/2 on June 1, 2013, so you could delay taking your first RMD until April 1, 2014. All subsequent RMDs must be taken by December 31 of each year.

This timing is no casual matter. The penalty for failure to take your RMD on time is a hefty 50% of the amount that should have been withdrawn — and you still have to pay taxes on it. This brings us to the next point.

—Factor in taxes: Although delaying your first RMD may seem to make sense if you don't need the money, there's another consideration: Even if you wait until the April 1 deadline, you still have to take your second RMD by December 31 of that same year — two distributions in one year.

Distributions are considered ordinary income and are taxed as such. Taking two in one year could bump you into a higher tax bracket. It's best to balance timing with tax implications.

—Calculate correctly: You must take an RMD from each of your retirement accounts, not just one.

Your RMD is based on the value of your account on December 31 of the previous year, so start by listing the fair market value of your IRAs as of that date.

Next, determine your life expectancy using appropriate Life Expectancy Tables from the IRS. You can find them in publication 590, available at IRS.gov.

The basic formula is: fair market value/by life expectancy = RMD

Here's a simple example: Say your IRA is valued at $100,000. Using the Uniform Lifetime Table, the first year you would divide that by 27.4 years. So your first RMD would be $3,649.64.

To make it easy, the financial institution where you keep your IRA may calculate your RMD for you, but it's always wise to know the formula yourself.

—Decide how to take your distribution: While you calculate an RMD for each IRA, you don't have to take the distribution specifically from each. You can take the sum total of your RMDs from any one account, making it a much simpler process. The same goes for 403(b)s. If you have more than one, you can take the combined RMD from one account.

There's an exception, however, for 401(k)s and most other types of employer-sponsored retirement accounts. If you have more than one, you have to calculate and take a withdrawal from each individual account.

—Consider consolidating: If you have just one retirement account with one financial institution, taking your yearly RMD can be a pretty simple process. But if you have several accounts at various banks or brokerages, you might want to consolidate everything in one place.

You could also consider rolling any 401(k)s still at a former employer into an IRA. This would make it easier to calculate your total RMD, as well as to determine which account to tap for the distribution.

One more thought: Just because you're required to take a distribution doesn't mean you have to spend it. You can always decide to sock this money away in a taxable account and let it grow as you continue to enjoy a long retirement.

Carrie Schwab-Pomerantz, CERTIFIED FINANCIAL PLANNER(tm), is president of Charles Schwab Foundation and author of "It Pays to Talk." You can e-mail Carrie at askcarrie@schwab.com. This column is no substitute for an individualized recommendation, tax, legal or personalized investment advice. To find out more about Carrie Schwab-Pomerantz and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.

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