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​IRA distribution mistakes to avoid

With more people over age 7o owning retirement accounts these days, anyone nearing that age in the next few years needs to know the minimum distribution requirements for their accounts -- and how to avoid several common mistakes.

You'll find the rules in IRS Publication 590 Individual Retirement Arrangements. They specify when the distributions must commence, the number of years distributions must be made and the required amount of the distribution. These rules apply during the life of the account owner and to his beneficiaries.

On the face of it, the rules are simple and state that a minimum payment or distribution from retirement accounts owned by individuals must be made each year upon reaching a specified age. The minimum distribution is calculated by dividing the account value as of the most recent year-end by a factor from a table in Publication 590.

The factor coincides with the current age of the individual. For example, the factor for individuals age 70 is 27.4. So, if you're age 70 in 2015 and have an IRA with a value of $100,000 on Dec. 31, 2014, the minimum amount you must withdraw as your first annual required distribution is $3,650, or 3.65%.

These minimum distributions must commence on the "required beginning date," or RBD, which is generally when the retirement account owner reaches age 70½. Sounds straightforward, right? Like most things that involve IRS rules, it's not really.

First, amounts owned in Roth-type IRAs aren't subject to these minimum distribution rules.

Also, workers 70 or older who have a balance in their employer's retirement plan (a 401(k), 403(b), 457 or similar plan) who aren't 5 percent owners of their business and are still actively employed with that employer aren't required to take a distribution from their employer's plan until after they retire. In that case, the required beginning date for taking minimum distributions is the later of age 70½ or when the participant retires.

Here are three aspects of the rules that you should pay particular attention to:

Don't delay your first minimum distribution. According to the age 70½ rule, you must commence distributions no later than April 1 of the year following the one you turn 70½. So, if you hit that age in 2015, you can wait until April 1, 2016, to take your first minimum distribution. But if you do wait, you'll be required to take two distributions in the next year -- one for 2015 and the other for 2016.

Taking two distributions in one tax year will increase your taxable income and could cause you to be in a higher tax bracket. That could mean more of your Social Security benefits are taxable, or it could disqualify you for some deductions and credits you'd otherwise be eligible for. Before taking your minimum distribution, check with your tax or financial advisor to see which tax year is best for you to take your first one.

Combine minimum distributions carefully. If you have multiple IRAs and retirement accounts, be careful to take distributions correctly. While you must separately calculate a minimum distribution for each IRA, these amounts can then be totaled, and you can withdraw that total amount from any one IRA. However, the rules prohibit doing the same thing for your former employer's retirement plan accounts. So, if you have one or more accounts in an employer's retirement plan, you must calculate and withdraw the minimum distribution from each plan.

Avoiding distributions from IRAs. Finally, here's another twist in the rule that actively employed workers who participate in their employer's retirement plans aren't required to take taxable withdrawals until after they retire. If you're nearing 70 and want to avoid taking required distributions from your IRAs and you plan to continue working beyond 70, consider rolling over your IRA into your employer's retirement plan before you turn 70. That delays the requirement to take distributions from the IRA funds that are transferred into your employer's plan. This works well for individuals in a higher tax bracket who don't need the IRA distributions for income.

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