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Age-Based Tips from 59½ to 69½ and Beyond

Many tax moves regarding retirement benefits are dictated by age.

Natalie Choate, 05/11/2012

Natalie Choate will be speaking at a location near you if you live in Bethesda, Md. (5/31/12); Waltham (6/1/12) or Boston (7/10/12), Mass.; St. Paul (6/4/12) or Minneapolis (10/9/12), Minn.; Indianapolis (6/8/12), South Bend (9/20/12), or Evansville (11/16/12), Ind.; Philadelphia (7/18/12); San Diego (10/18/12); Atlanta (10/19/12); Albany, N.Y. (10/23/12); Iselin, N.J. (10/24/12); or Orlando, Fla. (Jan. 2013). See all of Natalie's upcoming speaking events.

How old are you? Many tax moves regarding retirement benefits are dictated by age. The "big years" are age 59½ (everybody knows that) and also, surprisingly, age 69½.

Here's a review of age-based tips, from young to old:

If you are under age 59½...
If you are under 59½, you must take care to avoid the 10% "extra income tax" (usually called the "penalty") that generally applies to retirement plan distributions received before that age. So keep the following tips in mind:

Avoid penalties with a Roth account: Make your annual IRA contributions to a Roth IRA if you are eligible. That way, if you need to take money out prior to age 59½, you can withdraw your own contributions tax- and penalty-free any time.

Use caution with Roth conversions: If you convert any traditional plan or IRA to a Roth IRA, remember that the amount converted will be subject to the 10% penalty if it is withdrawn within five years after the conversion and while you are still under age 59½ (unless an exception applies). So treat that conversion account as "off limits" until that period has expired. Pay the income tax resulting from the conversion from some other source of funds, such as your outside money or Roth funds that were converted more than five years ago.

Message for widows/widowers: If you inherited a traditional retirement plan from your spouse, don't roll it over to your own IRA until you are over 59½. Leave it in your deceased spouse's plan and withdraw funds from it penalty-free if you need money. Death benefits are penalty-free, and as long as the money stays in your deceased spouse's plan, it is considered a death benefit when you withdraw it. Once you roll the money into your own IRA, it loses its penalty-exempt death benefit status. For one more age-based reason to leave money in a deceased spouse's plan, see the last tip in this article!

If you are a beneficiary: If you inherit any retirement plan, and find you need some cash, tap the inherited plan before you tap any of your own retirement plans. Not only are the withdrawals from the inherited plan penalty-free (as death benefits), they are subject to less favorable minimum distribution requirements than your own retirement plans. An inherited plan must be drawn down over your life expectancy, beginning the year after your benefactor's death. With your own plan, you can defer all distributions until you reach age 70½, then withdraw using the Uniform Lifetime Table, which provides a much slower withdrawal rate than the single life table applicable to inherited plans. So it is usually better to preserve your own plan and deplete the inherited plan, if you must deplete one or the other.

Natalie Choate practices law in Boston, specializing in estate planning for retirement benefits. Her book, Life and Death Planning for Retirement Benefits, is fast becoming the leading resource for professionals in this field.

The author is not an employee of Morningstar, Inc. The views expressed in this article are the author's. They do not necessarily reflect the views of Morningstar. The author is a freelance contributor to MorningstarAdvisor.com. The views expressed in this article may or may not reflect the views of Morningstar.

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