Year End Tax Saving Tip For Retirees

(MoneyWatch)  If you're over age 70 1/2, you may be able to cut your income taxes this year by electing to skip your required minimum distribution ("RMD") from your IRA. But you may need to take some affirmative steps to ensure you don't get a distribution you don't need.

Required Minimum Distributions. Once you reach age 70 1/2, you're required to take a distribution each year from your traditional IRA. The amount is set by the IRS, and goes up every year as you age. It starts at about 3.6 percent of your account balance and goes to over 10 percent once you reach your early 90s.

• But last year, Congress passed a law that provides for a one year suspension of required minimum distributions, which means you don't have to take a distribution in 2009 if you don't want to.
• You're also required to take an RMD from 401(k), profit sharing and other qualified retirement plans, so check with your accountant to determine whether your accounts are subject to the RMD rules.

Automatic Distributions. Because the penalty tax for missing a distribution is so high (50 percent of the amount you were supposed to distribute), many people have implemented automatic distribution features on their IRAs. And often those distributions are made in the fourth quarter of the year. Generally, this is a good idea and ensures you don't miss your RMD.

But if you don't need the RMD this year, then you'll most likely have to inform your IRA custodian that you want to suspend the automatic distribution for 2009. Otherwise, you may end up paying taxes you could have avoided.

• But because the RMD has not been suspended for 2010, if you like the automatic RMD feature, you want to be sure that it is suspended for 2009, but still in place for 2010.
• If you're retired and have been taking monthly RMDs, you may still want to consider making changes for the last quarter of the year. If you don't need the extra distributions, you can reduce the distributions between now and the end of 2009.

Miscellaneous Accounts. If you're like many investors, you may have one primary IRA and then a number of smaller IRAs spread around at different custodians. In that case, you should check on each of those IRAs to ensure that you have the desired distribution elections in place for 2009.

• And don't forget about other types of accounts that might also be subject to the RMD rules but may not immediately come to mind, such as inherited IRAs, tax qualified annuities or a CD held in an IRA at the local bank.

Bottom line. If you don't need your RMD, then consider skipping it for 2009. But you should check with each IRA custodian to ensure that you won't automatically get a distribution you don't want.

Consult your individual tax advisor prior to making any tax decisions.
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