Prepare for the return of required minimum distributions in 2010

Required minimum distributions from IRAs and defined contribution plans were suspended in 2009, allowing those typically required to take distributions to further grow their account values without penalties. But once 2010 rolls in, RMDs will resume. Here are the rules that govern required minimum distributions (RMDs) so you can be prepared.

How RMDs work

Generally, you'll have to begin withdrawing RMDs from your Individual Retirement Account (IRA) or qualified employer retirement plan (such as a 401(k) or 403(b) account) by April 1 of the year following when you turn age 70½ (the RMD amount will be based on the December 31 value of the account in the year prior to the year you turn age 70½). In all subsequent years, the RMD must be distributed by December 31.

Qualified employer retirement plans offer additional flexibility, allowing you to delay taking RMDs as long as you continue to work. Requirements for these types of accounts kick in April 1 of the year following your retirement if you work past 70½. Subsequent RMDs must be taken by December 31.

RMDs aren't required for Roth IRA accountholders but do apply for non-spouse beneficiaries. However, a spouse who is a beneficiary can elect to roll over to his or her own Roth IRA, postponing distributions until his or her death.

If you fail to take your full RMD on time in any year, you'll owe the IRS a penalty of 50% of the required amount that wasn't distributed.

Calculating your RMD

So now you've turned age 70½ and it's time to start calculating your RMDs. But how? The most common way is to divide your account balance at the end of last year by a life expectancy factor (available at irs.gov) based on your current age. Your financial advisor can do a fresh RMD calculation for you each year.

If your spouse is more than 10 years younger than you and is the sole plan beneficiary for the entire year, you should use the IRS Joint Life Expectancy Table to calculate your RMD. Because this table is based on a longer life expectancy, using it will result in lower annual RMDs.

Understanding and following the rules regarding RMDs can help you avoid costly penalties and pursue a tax-smart strategy that gives you control of your money and supports your retirement goals. Talk to your Ameriprise financial advisor to get more information.

Options for using RMDs

If you don't need to use your RMDs for current living expenses, here are some alternatives:

Reinvest the after-tax proceeds into a tax-efficient account. Consider investing in a tax-efficient mutual fund or municipal bond fund.

Invest your after-tax proceeds in a 529 college savings plan for your children or grandchildren. Withdrawals from a 529 plan are tax free when used to pay for qualified higher education expenses (e.g., tuition, room and board, and books and supplies) at eligible colleges and universities.

Also, as a result of the American Recovery and Reinvestment Act of 2009, computer, internet access and related services and software purchases are now considered qualified higher education expenses under 529 plans. This rule applies only in 2009 and 2010, and only if the computer and internet access are used while the student is in school, and if the software is educational in nature.

Contribute your RMDs to charity. Giving to charity can be very rewarding to both the recipient and you. But to claim a tax deduction on a donation, you'll need to follow IRS rules and keep records of your gifts. A tax deduction is generally available up to 50% of your adjusted gross income. And deductions are not allowed for monetary gifts unless accompanied by a bank record or a written receipt from the charity indicating the amount of the contribution, the date of the donation and the name of the charity. Go to irs.gov for complete details.

Making the appropriate withdrawals from your retirement accounts can help you steer clear of hefty penalties so you can enjoy more of your hard-earned money. If you have any questions about the reinstatement of RMDs in 2010, talk to your financial advisor or go to irs.gov.