Optimizing Your Minimum IRA Distribution

Had you created a Roth I are a for yourself rather than the traditional IRA, you would not need to take mandatory distributions at age 70 1/2. On the other hand, your IRA contributions would not have been tax deductible.Since you have a traditional IRA for which you deducted contributions, the US government makes sure that you don't keep your money in it permanently. The moment you attain the age of 70½ years, it's necessary for you to start taking a Minimum IRA distribution from your account so that the government may collect the tax you have deferred over decades.

The specific amount of the minimum IRA distribution will be calculated by using an IRS formula that takes into consideration your balance in the account(s), your age, and your expected life time based on IRA RMD tables. Your account provider would most likely notify you about the precise amount of your IRA Minimum Distribution, but if they do not, the burden is on you to make sure your minimum IRA distributions get taken on time and in the correct amount.

What if you don't need the money that you withdraw to pay your bills and would rather have the money continue to grow?

Here are a few options that you may reflect on:

1. Take your distribution "in-kind." While most people think that distributions from IRAs must be cash, the IRS permits you to distribute property. Let's say you have 100 shares of your favorite stock in your IRA. It is not necessary for you sell the shares and distribute cash to meet your minimum IRA distribution requirements. You can simply instruct your custodian to distribute the hundred shares to you. More precisely, you instruct your custodian to send those shares to your regular brokerage account. That way, you continue to hold your favorite investments.

2. Investments while in your IRA were tax-sheltered. Therefore, investments and investing methods that would normally generate high taxes could be used. As an example, if you like the idea of buying high-technology stocks on a momentum basis which need to be traded frequently, this type of investing is perfect for an IRA because it would normally create a lot of ordinary income tax. But once you distribute the amount from your IRA for reinvestment, you want to select investments that generate little taxes. This might include anything from tax-free bonds to growth stocks that you will hold for long periods of time that do not pay a dividend.

3. You can donate your minimum IRA distribution or expend it on your family members or friends. Although 2011 as last year, there are significant benefits to using the IR S provision for a qualified charitable distribution. If you are wealthy enough not to require your minimum IRA distribution to pay your bills, it is because you have made a wise financial decision that makes you feel secure because of your retirement savings.

Therefore, why not spend your IRA RMD on enjoyment? It could be a cause that you wish to support, a trip you always dreamed of, or a gift to your grandchild to supplement his college funding. You have earned your right to have some fun with your money, therefore, you should spend it on something noteworthy after your retirement.