Required Minimum Distribution (RMD) planning for those who are turning 70 ½ in 2012.
If you have a 401(k) or traditional IRA plan and are turning 70 ½ this year you are now subject to the RMD rules. These require you to take at least a minimum distribution from your plan based on its balance. The law says the distribution must be taken by April 1st of the year after you turn 70 ½. While sometimes it makes sense to defer the income as long as possible, this may not be the year to do it. We don’t know what tax rates will look like in 2013, but they are currently scheduled to go up absent any congressional action to adjust them. There is also a new 3.8% “Medicare” tax on investment income to the extent your adjusted gross income (AGI) exceeds $200k (single) or $250k (married). If your income is expected to exceed this threshold it may make sense to take the distribution in 2012. You should also consider that if you wait until 2013 to take your RMD you still would need to take the 2013 RMD in 2013, resulting in additional income for that year. If your AGI was otherwise close to the income limit the 2 payments may push it over the top.
The pension/IRA distribution itself isn’t subject to the 3.8% tax, only investment income is, but it is taken into account in determining your AGI level. If you have investment income and your AGI exceeds the threshold, at least a portion your investment income will be subject to the extra tax.
Many people will be waiting until the end of the year to make decisions on income, hoping to gain some clarity from congressional action (or inaction). Keep in mind that all pension/IRA custodians have a cutoff date by which you must submit your request for distribution. With the expected high volume of year end transactions, waiting too long could cause you to miss this opportunity.