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Your Money | PERSONAL FINANCE / KATHY M. KRISTOF

Seniors Who Have 'Too Much' Saved Can Draw on Disbursement Options

Although there is no way to postpone traditional IRA distributions past age 70 1/2, there are ways to take less money out each year.

October 18, 1998|KATHY M. KRISTOF | Kathy M. Kristof is a syndicated columnist and author of "KathyKristof's Complete Book of Dollars and Sense."

Donald Baldwin has a delightful problem: The Anaheim retiree has too much money saved for retirement. He and Katie, his bride of 49 years, have been living on the income from their savings since they retired in 1992. It's more than enough to not only pay their monthly living expenses, but also to give money to their kids, to charity and to finance some fabulous vacations, including the month they're about to spend in Europe.

But, as Baldwin approaches his 70th birthday, tax rules dictate that he soon start taking distributions from his individual retirement accounts, which are worth a total of about $240,000. That's likely to push him into a higher tax bracket while depleting savings that he'd feel far more comfortable leaving alone.

Baldwin, who attributes his over-saving--or under-spending--to his generation's Depression-era mentality, is by no means unique.

Though such "too-wealthy" seniors might be in the minority, financial planners and other experts say there are hundreds of thousands of retirees who face a similar quandary because they are wealthy enough to want to leave their IRAs untouched, even late in life.

"It is not necessarily that all these people are independently wealthy, but they may have Social Security and another pension, so they have been living comfortably on just a portion of their savings for years," says Robert D. Siefert, a certified financial planner with Back Bay Financial Group Inc. in Boston. "Now Uncle Sam is tapping on the window saying, 'Here's this other money and you need to start taking it into income.' They don't need the additional income and they don't want to start paying tax on it."

Unfortunately, there is no way to postpone retirement plan distributions past age 70 1/2, planners say. However, there are ways to take less out of your IRA savings each year, which can help keep your current income taxes at reasonable levels and might even provide benefits to your heirs.

In a nutshell, you can choose a stretched-out "distribution formula," which can dramatically reduce the minimum amount you must withdrawal from your IRA, says Elaine Bedel, president of Bedel Financial Consulting Inc. in Indianapolis. Unfortunately, if you don't opt for one of these slower-paying formulas before receiving your first distribution check, you permanently lose the ability to stretch your IRA payments over a longer period. You can always withdraw more than the minimum required, but you can't withdraw less than necessitated by the distribution formula you originally chose, Siefert adds.

That makes it imperative that seniors spend some time thinking about what they'd like to do with their IRA money before they reach age 70 1/2, when they must begin withdrawals.

What are the options?

Tax rules allow essentially four ways to take mandatory minimum IRA distributions. You can take all your IRA money out in a lump sum; you can take it out in roughly equivalent increments over your projected life span; you can take it out ratably over the joint projected life span of you and your spouse; or you can withdraw it ratably based on the projected joint life span of you and another beneficiary. (Theoretically, you are supposed to deplete your IRA accounts before you die.)

How do you know how long you'll live? You don't. But the IRS provides tables that are based on mortality statistics. These statistics say a 70-year-old man will live until he's 86, so to deplete his IRA in relatively equal installments, he'll take 1/16th (the 16 years he's expected to live after age 70) of his IRA money out in the first year of mandatory withdrawals and 1/15th of the remaining amount in the following year. To determine the right withdrawal amount, you simply apply the number that corresponds to your age and your distribution method from the applicable IRS table.

Though the standard IRA distribution method--which many plan trustees will choose for you if you don't notify them otherwise--is based on the account holder's single life expectancy, if you aim to deplete your IRA as slowly as possible, it is among the worst methods to choose. (The only worse choice would be to take all the money out in a lump sum. However, those who think they'll never need their IRA money might opt for a lump sum in order to roll the proceeds over into a Roth IRA, which does not require any minimum withdrawals during the account holder's lifetime and provides some estate tax benefits to heirs. But that's another column.)

The problem is that the single-life formula requires the highest minimum distributions, and, consequently, depletes your account the fastest. To illustrate, consider Baldwin's case. If he chooses the single-life formula, he must withdraw 1/16th of the value of his IRA--$15,000 total--in the first year.

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