Compulsory cash

By Anne Tergesen, THE WALL STREET JOURNAL — 10/25/10

Congress, in an effort to give battered nest eggs time to recover, in late 2008 suspended the rule requiring older Americans to take withdrawals from tax-deferred retirement accounts such as traditional individual retirement accounts and 401(k)s.

The suspension—which was in place for 2009 only—is now over. Here are answers to some of the most commonly asked questions about required distributions in 2010:

I turned 70½ in 2009. When do I have to take my first required distribution?

• Normally, account holders must begin withdrawing money by April 1 of the year after they turn 70½. So, under normal circumstances, people who turned 70½ in 2009 would have had until April 1 of this year to take their first required distribution.

• But as part of the 2009 suspension, people who turned 70½ in 2009 were allowed to skip their first mandatory withdrawal—the one that had to be taken by April 1. That means these individuals have to take only one distribution this year, and the deadline for that is Dec. 31.

• For people who turn 70½ this year, however, the normal rules will apply—they will have until April 1, 2011, to take their first distribution, and until Dec. 31, 2011, to take their second distribution.

Has the formula for calculating withdrawals changed?

• No. To calculate the minimum amount the Internal Revenue Service requires you to withdraw annually, look at your account balance as of the previous Dec. 31 and divide that figure by your remaining life expectancy. You can always withdraw more. But if you take out less, you will be subject to a 50% excise tax on the amount you should have taken.

• Should I use my account's balance as of Dec. 31, 2009—or Dec. 31, 2008?

• For both account owners and beneficiaries who inherit IRAs, the answer is the same: Use your account's value as of Dec. 31, 2009.

Which life-expectancy figure should I use—my actual life expectancy or the number I would have used in 2009?

• Investors should use the life expectancy that corresponds to their current age. This data can be found in actuarial tables in IRS Publication 590.

Please consult with your tax professional to ensure compliance with these IRS rules.