Required IRA distribution deadlines, charitable rollover alternative

Some people say they want to work forever. Not me.

I'm looking to retire as soon as possible. To that end, I've been contributing as much as I can afford to as many retirement savings plans as I can and can.

One of those retirement vehicles is a traditional IRA. And no, I didn't convert it to a Roth IRA last year. An examination of my current tax and personal financial situation and my expectation that I'll be in a lower tax bracket when I retire convinced me to stay with the traditional plan.

What that means, though, is that eventually I'll have to start taking money out of my traditional IRA. Tax law demands owners of these tax-deferred accounts take required minimum distributions, or RMDs, once they turn 70½ years old. 

The reason Uncle Sam mandates that you finally take out some of your traditional IRA money is simple: He's tired of watching your retirement account grow without him getting a share, which is at ordinary income tax rates.

Note that RMDs also apply to 401(k) plans, those tax-deferred retirement savings accounts offered by many workplaces.

Roth IRAs, however, aren't subject to RMDs. You paid taxes on money in this type of IRA before you contributed it to the account, so the IRS already got its cut.

How much and by when? The precise amount you must withdraw once you meet that septugenarian and a half milestone depends on your age.

But you get a little leeway for your very first RMD. For that initial required minimum withdrawal, you can wait until April 1 of the next year.

For 2010 first-time RMD folks, that Aprl 1, 2011, deadline is little over a week away. Please mark your calendar.

The whys and wherefores of RMDs and the April 1 distribution date are discussed in today's Daily Tax Tip.

If you had a 70½ birthday party last year, congratulations! I hope it was a rockin' one. If you didn't take your 2010 RMD by last Dec. 31, my belated (but sincere!) birthday gift to you is to let you read today's tax tip at your leisure.

I do, though, want to elaborate a bit on one RMD alternative, the option to roll your required withdrawal amount directly to a qualified charity.

Withdrawing, but not paying tax on, an RMD: The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 that became law last December reinstated the IRA-to-charity option for older IRA owners.

Once again, folks age 70½ can transfer up to $100,000 a year from their tax-deferred retirement accounts to qualified charities. This option also will be available through 2011, but after this year, it must again be extended by Congress.

Any older IRA owner can make this charity transfer choice. But traditional IRA owners who must take RMDs but who don't need the money to live on are the big winners.

When they have their RMD amount directly transferred to their favorite IRS-approved charity, they meet the RMD rule, but escape taxes on the distribution amount.

The key is the direct transfer. Don't touch the money, even to then hand it over to the nonprofit, or you will owe taxes on it. This money move must be trustee-to-trustee.

If this charitable donation of your RMD works for you, great. But remember that if you've yet to take your initial RMD, you still have to meet the April 1 distribution date.

So talk soon with our IRA manager and financial and tax advisor(s) and make sure you get everything in place for the April Fool's RMD deadline.

Related posts:

• No joke! Some RMDs due today
• Retirement, RMDs and racing
• 401(k) Do's and Don'ts
• Handy retirement plan rollover chart
• Required retirement withdrawals waived … in 2009
• Will you outlive your nest egg?
• Taxes and the older filer
• Getting your rocking chairs on the same porch

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