How to play by the rules when you must make IRA withdrawals
Q: I understand that when I reach age 70-1/2, I must begin to take distributions from my IRA and Keogh. But I have never seen any information about how much those distributions must be. How much do I have to withdraw from retirement accounts after age 70-1/2?
S.C., via e-mail
A: You have to take out at least as much as the government has determined by a longstanding formula, says Susan Travis, senior vice president and trust officer at Kanaly Trust Co., in Houston.
The amount is based on the market value of your accounts, your age, and a table provided by the IRS. Each year, you take the previous Dec. 31 market value and, based on your age, divide it by your applicable divisor on the IRS table. You can locate the tables on the IRS website, www.irs.gov. Search for Publication 590, Appendix C.
Most people should use Table III, the Uniform Lifetime Table. There are exceptions, however, so make sure to consider your specific situation.
For example, if you have $100,000 in an IRA and want to compute your required minimum distribution, first, consider the timing. The IRS rule states that you have to take a required minimum distribution (RMD) by April 1 of the year after you turn 70-1/2 and every year thereafter.
"Be careful on this one," cautions Ms. Travis. If your 70th birthday is after June 30th, you may "delay" a distribution into the following year if you so desire. But you will also need to take one in the year you turn 71. So if you delay, you may be forced to take two distributions in the first year, and this may bump you into a higher tax bracket, she says.
Another consideration is to use the correct applicable divisor each year. Financial institutions are required to provide notice of an RMD, so they may calculate this step for you. At age 70, your divisor is 27.4. Therefore, your required minimum distribution would be: $100,000 divided by 27.4, which is $3,649.64.
Each year, your market value and applicable divisor will change.
In general, as you age, your divisor decreases. For example, the same $100,000 IRA at age 80 would have a $5,348 required minimum distribution.
Q: I have been investing in a mutual fund for a number of years. It was a leader in its group, but a few years ago, the fund managers changed. Now the fund lags behind its peers. I keep hoping the situation will improve, but I am increasingly skeptical that it will happen. While the Dow Jones Industrial Average is at record highs, my fund is off 7 percent this year. When is a good time to bail out? If I leave the fund company completely (as opposed to moving to another fund in the group), what are the tax implications?
A.N., Washington, D.C.
A: It's a good time to chuck a fund when you decide that it isn't working for you now, and probably won't in the future, says Thomas Curtis, a certified financial planner in Gaithersburg, Md. He advises clients to watch for developments such as changes in fund managers, which is exactly what has happened in your case. Other changes are in performance over time, which you also have charted. Moving from one mutual fund to another is more of a "style" decision on your part, he says.
If you decide to sell any or all of your position in a fund, you're liable for any taxes due on any gains. It doesn't matter to the IRS whether you stay with the same family of funds; a sale is a sale. If these are funds with loads, or sales commissions, you might see that charge waived if you switch from one of the family's funds to another. But that's no concern of the tax man.