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Taking retirement money
late can cost you penalties

IF you invest in a "traditional" IRA and a 401(k) or other employer-sponsored, tax-deferred retirement plan, you can help yourself make progress toward the retirement lifestyle you've envisioned. Consequently, you'll want to let your IRA and 401(k) have growth opportunities for as long as possible. Sooner or later, though, you'll have to start taking money out of these plans. And when that day arrives, you'll want to know the withdrawal rules, because, by making the right moves you can avoid costly penalties and help ensure the most efficient way to tap into your money.

Required distributions

The rules governing withdrawals fall under the Internal Revenue Service's "required minimum distributions" guidelines. Here are some of the key points to keep in mind:

>> You should take distributions by age 70 1/2. If you don't take your first distribution during that year, you must take it no later than April 1 of the following year. And if you do put it off until April 1, you'll need to take two distributions in one year. So, for example, if you turn 70 1/2 in May 2005, you'll need to take your first distribution by Dec. 31, 2005. If you don't, you'll have to take it by April 1, 2006 -- and then, you'll have to take your second required distribution by Dec. 31, 2006.

If you don't take your distributions on time, you may have to pay the IRS a 50 percent penalty tax on the taxable portion of your uncollected distribution, so make sure you know your dates.

>> You can take more than the minimum, but, as the word "required" suggests, you can't withdraw less.

>> You may be able to delay required minimum distributions if you're still working. If your employer's retirement plan permits it, you may not have to take the required distributions if you are still working and you are 70 1/2 or older. However, this exception won't apply if you own 5 percent or more of your company.

Calculating distributions

To determine your required minimum distribution, you'll probably use one of these tables:

>> Uniform Lifetime Table. Most people will use this table. You look up your age and find your life expectancy factor. Then take the balance of your retirement accounts as of Dec. 31 of the prior year and divide by the factor. To illustrate: According to the Uniform Lifetime Table, the factor for age 70 is 27.4, so, for your first required distribution, you take your retirement plan balance as of Dec. 31, 2004, (assuming you turn 70 1/2 in 2005) and divide by 27.4.

>> Joint Life Table. You can use this table if you have a spouse who is the sole beneficiary and who is more than 10 years younger than you are. When you use this table, you take your retirement plan balance from the previous year and divide it by a joint life expectancy factor. Since this number will be higher than your individual life expectancy factor, your required distributions will be lower than if they were calculated on the Uniform Lifetime Table.

Before you start taking distributions, see your tax adviser.