Meeting your obligations and finding some opportunities

After you turn 70 1/2, the IRS requires you to withdraw some of the money in your retirement savings accounts each year. These withdrawals are officially called Required Minimum Distributions (RMDs). While you never have to make withdrawals from a Roth IRA, you must take annual RMDs from traditional, SEP and SIMPLE IRAs, pension and profit-sharing plans and 401(k), 403(b) and 457 retirement plans annually past a certain age. If you don’t, severe financial penalties await.

 If you are still working as an employee at age 70 1/2, you don't have  to take RMDs from a profit-sharing plan, a pension plan, or a 401(k),  403(b) or 457 plan. Your initial RMDs from these accounts will only be  required after you retire. However, you must take RMDs from these types  of accounts if you own 5 percent or more of a business sponsoring such  a retirement plan. 
 You must take RMDs from IRAs after you turn 70 1/2 regardless of  whether you are still working or not. 
 The annual deadline is Dec. 31, right? Yes, with one notable exception.  The IRS gives you 15 months instead of 12 to take your first RMD. Your first one must be taken in the calendar year after you turn 70  1/2. So if you turned 70 1/2 in 2011, you can take your initial RMD any  time before April 1, 2013. However, if you put off your first RMD until  next year you will still need to take your second RMD by Dec. 31, 2013. Calculating RMDs can be complicated. You probably have more than one  retirement savings account. You may have several. So this gets rather  intricate. 
 - Multiple IRAs. Should you have more than one traditional, SEP or  SIMPLE IRA, the annual RMDs for these accounts must be calculated  separately. However, the IRS gives you some leeway about how to  withdraw the money. You can withdraw 100 percent of your total yearly  RMD amounts from just one IRA, or you can withdraw equal or unequal  portions from each of the IRAs you own. 
 - 401(k)s and other qualified retirement plans. A separate RMD must be  calculated for each qualified retirement plan to which you have  contributed. These RMD amounts must be paid out separately from the  RMD(s) for your IRA(s). 
 - Inherited IRAs. The same applies; a separate RMD must be calculated  for each inherited IRA you have, and these RMD amounts must be paid out  separately from RMD(s) for your other IRA(s). 
 This is why you should talk to your financial or tax advisor about your  RMDs. It is really important to have your advisor review all of your  retirement accounts to make sure you fulfill your RMD obligation. If  you skip an RMD or withdraw less than what you should have, the IRS  will find out and hit you with a stiff penalty: you will have to pay 50 percent of the amount not withdrawn. 
 Are RMDs taxable? Yes, the withdrawn amounts are characterized as  taxable income under the Internal Revenue Code. Should you be  wondering, RMD amounts can't be rolled over into other tax-deferred  accounts and excess RMD amounts can't be forwarded to apply toward next  year's RMDs. 
 What if you don't need the money? If you are wealthy, you may come to  see RMDs as an annual financial nuisance, but the withdrawal amounts  may be redirected toward opportunities. While putting the money into a  savings account or a CD is the usual route, there are other options  with potentially better yields or objectives. That RMD amount could be  used to: - Start a grandchild's education fund. - Fund a long term care insurance policy. - Leverage your estate using life insurance. - Diversify your portfolio through investment into stock market  alternatives. 
 There are all kinds of things you could do with the money. The  withdrawn funds could be linked to a new purpose. So to recap, be vigilant and timely when it comes to calculating and  making your RMD. Have a tax or financial professional help you, and  have a conversation about the destiny of that money. 
 Brad Ledwith is a certified financial planner and runs his own wealth  management firm in Morgan Hill. He is a registered representative with  and offers securities through LPL Financial, member FINRA/SIPC. CA Lic.  OC69547. If you have financial questions you would like to have  answered in this column in the future, email [email protected]. 

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