The Best Ways to Take Required IRA Disbursements
Read and follow IRS rules for required minimum distributions from your IRA to save money and prevent headaches down the road. The contribution period for a traditional individual retirement account will eventually end. RMDs are necessary to supply the Internal Revenue Service with the tax dollars you deferred during this time. While you can't eliminate income tax on required distributions, there are ways to take RMDs that reduce your tax bill and ensure you don't incur additional fees or penalties during the withdrawal period.
IRS regulations say you must begin taking RMDs no later than April 1 after year you reach age 70 1/2. Yearly distributions remain a requirement even if you are still working and if you do not need the money to cover living expenses. It's your responsibility to calculate the correct amount and make sure you take each distribution on time. Failing to do this will result in a penalty tax assessment in which the IRS taxes the RMD at a 50 percent rate in addition to regular income taxes.
Conversion to a Roth
The best way to take required IRA distributions may be to take a one-time distribution as part of a Roth conversion strategy. While you can't convert an IRA to another tax-deferred account, you can roll over a traditional IRA to a Roth account. Although income tax will apply to the entire distribution at the time you make the conversion, Roth IRA withdrawals are tax-free and there are no distribution requirements. It's up to you whether to withdraw money from a Roth and how much.
Fund an Annuity
Use your RMD to set up payments over time, fund a fixed annuity and guarantee income for life. The income insurance a fixed annuity provides will ensure a steady income stream -- starting now or sometime in the future -- and eliminate the chance you will deplete your retirement funds during your lifetime. Because annuities have no minimum depositor withdrawal requirements, you can keep part of your RMD to manage as you choose and turn the rest into income insurance.
Donating a required distribution to a charity of your choice is a way to take an RMD while reducing the modified adjusted gross income on your tax return. If you already donate to one or more charities, all you are really doing is altering the source of the money. As of 2013, IRS regulations allow you to direct-donate and exclude from gross income up to $100,000 a year.
Based in Green Bay, Wisc., Jackie Lohrey has been writing professionally since 2009. In addition to writing web content and training manuals for small business clients and nonprofit organizations, including ERA Realtors and the Bay Area Humane Society, Lohrey also works as a finance data analyst for a global business outsourcing company.