The general rule for required minimum distributions is pretty straightforward. You must begin taking a minimal amount of money out of your regular individual retirement accounts (IRAs) and other qualified retirement accounts, such as a 401(k), by the end of the year you turn 70 1/2, or no later than April 1 of the following year. You must continue to make minimum withdrawals no later than December 31 every year thereafter, until your death or you drain your retirement accounts. You’ll pay income taxes on all earnings and pre-tax contributions at your regular income-tax rates.

Say you turn 70 1/2 on October 1 of this year. Then you must start making minimum withdrawals by April 1, 2001. However, if you turn only age 70 on October 1, you can wait until April 1 of 2002, because you won’t be 70 1/2 until 2001. 

Just so the rule isn’t too straightforward, there are exceptions to this general rule. One big 
exception is that you don’t have to take minimum distributions from a Roth IRA at any time up to your death. You can pass it on to your heirs, who in turn will have to begin minimum withdrawals.

You also don’t have to start taking minimum withdrawals from your current employer’s qualified retirement plan if you are still working at age 70 1/2. You can wait until you retire. However, you can’t delay beyond age 70 1/2 if you own at least five percent of your employer’s business. You also can’t delay distributions from a simplified employee pension plan (SEP) or a savings incentive match plan for employees (SIMPLE IRA). 

One of the next issues is whether you want to delay starting the minimum distributions until 
April 1 after the year you turn 70 1/2. By waiting, the money has that much longer to grow tax-deferred, which is usually a good thing. However, the strategy could boost you into a higher tax bracket for the year. Say you wait until April 1 next year to take your first distribution. Technically, that distribution is for the year 2000. Your next distribution will be for 2001. You can’t delay that distribution into April 1 of 2002. That must be made by December 31, 2001. Consequently, you will have made two minimum distributions in the same tax year. You’ll want to run the numbers by your financial planner or tax advisor to determine whether the increased earnings from the delay exceed the increased taxes. Usually it won’t.

Keep in mind several other key issues about starting your required minimum distributions. 
First, you must select one of three distribution options by the time you make your first 
required distribution. Your choice, which is irrevocable, determines the minimum amount you must withdraw each year. You also must choose either a single life expectancy or a joint life expectancy, and a beneficiary, if you haven’t already. You can change your beneficiary after distributions begin, but it cannot decrease your minimum distributions. 

There is no single best method for everyone, so you want to review your options with your Certified Financial Planner practitioner. The important point is to remember to make the choice, preferably ahead of time. If you fail to make a choice, you’ll end up with the default option outlined in the plan document.

Second, if you neglect to make your withdrawals by the required beginning date, or you don’t take out enough, you’ll pay a penalty of 50 percent on the difference between what you took out and what you should have taken out. 

Third, understand that the minimum required distribution rule is a minimum, not a maximum. That is, you can take out more than the minimum required amount in any given year because you need or want the money. You can empty the entire account at one time if you want. You’re not locked in.

July 2000— This column is produced by the Financial Planning Association, the membership organization for the financial planning community.