If you are approaching age 701/2 and have untapped funds in an individual retirement account or a qualified retirement plan such as a 401(k) you have a big decision to make by April 1 - how to withdraw your money.
Your payout method will determine the minimum amount you must withdraw from your account each year, which in turn will affect your taxes. Once you make the selection, you can't change your mind.To determine your required minimum distribution, divide the balance of your account at the end of the previous year by your life expectancy or the joint life expectancy of you and your designated beneficiary. By choosing a joint life expectancy, you can stretch out distributions.
You have three choices in deciding how to calculate your minimum payouts:
- THE RECALCULATION METHOD. This method is available only if your beneficiary is your spouse. It recalculates both of your life expectancies each year and bases the minimum distribution on the longer of the two.
There is one major disadvantage, though. If your spouse should die before you do, his or her life expectancy would cease, and the next year you would have to revert to a single-life-expectancy calculation. That would boost your distributions and increase the amount of taxes you would have to pay each year.
- THE TERM CERTAIN METHOD. This method assumes that your life expectancy - or the joint life expectancy of you and your beneficiary - is fixed at the time you turn 70 1/2 and will decline by one year during each subsequent year. It is the easiest method to calculate, but you risk outliving your money.
- THE HYBRID METHOD. This payout strategy allows you to use a combination of the other two methods: the recalculation method for the account owner and the term certain method for your beneficiary. You can stretch out withdrawals longer than with the term certain method. But if your beneficiary dies first, you can continue to use the joint-life-expectancy factor so you don't have to accelerate your minimum withdrawals.