Last December, Congress approved a one-year holiday for RMD’s (required minimum distributions) in 2009.  That means that if you are over 70 1/2, you won’t be forced to take distributions. Unfortunately this RMD holiday is for 2009 only -  but you can really take advantage of this right now. Let’s get to work.

1.  If you don’t need the money from the IRA – don’t take it.

There is no good reason for taking money out of your IRA this year if you don’t really need it.  Well…..if your tax bracket is very low this year and you are pretty sure it’s going to  go up next year and beyond, maybe you’d take your distributions this year.  But generally, you are much better off by keeping Uncle Sam in the waiting lounge as long as possible.  If you are currently taking your distributions via monthly periodic payments and you don’t need the money, call your bank or brokerage firm right now and have them stop sending you checks.

As an added benefit, this gives your account more time to recover from last year’s carnage.

2.  If you have an “Inherited IRA” and are under mandatory distribution – you can also elect not to take payments this year.

An “Inherited IRA” is an IRA that you received because someone other than your spouse passed away and named you beneficiary. Regardless of your age, if you have an ‘Inherited IRA” you are required to take RMD’s – but not this year.

Shut off the payments if you don’t need the money.  Give the IRS what for!

3.  If you need some, but not all of your RMD – take the money out on an as-needed basis.

This is not an all or nothing deal.  Jon took out $1200 a month last year under the RMD requirements.  This year he won’t be forced to take any distribution. But he does need about $400 a month to make ends meet.  He reduced his distributions to that amount. If you have a similar situation, you can do the same thing.  Score another one for the good guys.

4.  Take advantage of being in a lower tax bracket.

If you don’t take the RMD this year, you might find yourself in a lower tax bracket.  If so, this could be a great time to sell appreciated assets and pay lower capital gains tax.  BOOYAH! If you want to get really fancy, you could sell appreciated assets and use that money to supplement your budget.

Why would you do this?

Because capital gains taxes are lower than the tax you pay on ordinary income.  And when you take money out of your IRA, it’s ordinary income.

5.  Consider converting part of your IRA to a ROTH IRA.

Under very special circumstances, this could be the best way to give the IRS a friendly “black eye”.  Of course, make sure you know what the Roth IRA contribution limits are.

If you make less than $100,000 you might convert your traditional IRA to a ROTH.  You might even do it with the money that would have withdrawn for the RMD.  If you convert to a ROTH, you’ll be able to control when and how much you take in distributions.

Generally, I’m not a huge fan of converting a Traditional IRA to a ROTH IRA.  I ran some numbers and it turns out that if you don’t need the money for at least 15 years and can pay the tax on the distribution from other sources, it might be a good idea. It’s somewhat complicated – I’ll write a post on this subject alone shortly. Bottom line? I recommend this only for people who don’t really need or want IRA distributions for many years.

I love using the IRS as my personal pinata.  Can you think of any other opportunities to stick it to the (IRS) man?

photo by Ana Duncan Art, Flikr

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