When it comes to taxes, reaching age 70½ is an important milestone. That's because you have to start taking minimum annual distributions from your traditional IRAs when you reach age 70½. And if you've already retired you also must begin making withdrawals from your retirement plan as well. If you don't take these minimum distributions when you're supposed to, you could get hit with a 50% penalty tax.
When must these minimum distributions begin? If you reach age 70½ in 2002, you actually have until April 1, 2003 to take your first year's distribution, namely the one for 2002 (your age 70½ year). However, if you wait until 2003 to take this distribution, you may wind up loading too much income into 2003. That's because you'll also have to take your second year's annual minimum distribution in 2003, since the extended year deadline until April 1 is available only in the first distribution year. That could have unpleasant tax consequences. For example, you may be pushed into a higher tax bracket in 2003. Additionally, you may be hit with a larger tax on social security benefits in 2003, and saddled with larger cutbacks for deductions (such as for medical expenses) that have an adjusted-gross-income-based "floor."
However, the decision whether or not to accelerate minimum distribution payouts is not any easy one and is not for everyone. For example, if a 73-year-old retires in December 2002, and doesn't take a required minimum distribution in 2002, he must take two required minimum distributions in 2003. In any event, your overall financial picture must be taken into account.
We invite you to contact Alan Ehrlich at our office (ext. 108) with regard to the above.
