Time for an IRA Distribution?

Many retirees who had watched their IRA balances shrivel during the last quarter of 2008 had hoped that Uncle Sam would allow them to skip their required minimum distribution this year so they wouldn't have to withdraw money from their shrunken accounts. But their prayers went unanswered. Although Congress agreed to suspend the mandatory distributions requirements for 2009, the Treasury Department decided it would be too confusing to change the rules for 2008 distributions so late in the year.

That means if you are 70 ½ or older, you must take a withdrawal from your traditional IRA or other retirement accounts by December 31. (Roth IRAs have no mandatory distribution requirements.) If you don't, you will owe a stiff penalty equal to half the amount you failed to withdraw.

Your minimum withdrawal is based on your account balance as of December 31, 2007, divided by your life expectancy as outlined in IRS Uniform Lifetime tables. For example, a 76-year-old with a $200,000 IRA balance in 2007 would be required to withdraw at least $9,091 by year end based on his 22-year life expectancy.

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You can always withdraw more than the minimum amount. You will owe taxes at your ordinary tax rate on all your retirement account withdrawals (except Roth IRA which are tax-free.)

If you don't need the money and are in a charitable mood, you can donate some or all of your required minimum distribution -- up to $100,000 -- directly to a charity tax free. But you can't use your tax-free IRA distribution to fund a donor-advised fund, a charitable remainder trust or a charitable gift annuity.

Although you can't double dip and claim a charitable deduction, the tax break may be even more valuable because you won't have to include your IRA distributions in your adjusted gross income. As a result, you could benefit from other tax breaks, such as reducing taxes on your Social Security benefits, boosting your deductible medical expenses, or avoiding the additional Medicare surcharge in future years -- all of which are tied to your adjusted gross income.