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By Jason Stipp | 03-17-2011 04:37 PM

Six Retirement Tax Pitfalls

Avoid penalties and overpayments by managing your required minimum distributions, withdrawal sequence, quarterly tax estimates, deductions, and more.

Jason Stipp: I'm Jason Stipp for Morningstar.

It's Tax Relief Week on, and today, we're talking about managing taxes in retirement. A big part of that is avoiding retirement tax pitfalls.

Here with me to talk about that is Morningstar's Christine Benz, director of personal finance.

Thanks for joining me, Christine.

Christine Benz: Jason, great to be here.

Stipp: So Christine, you have six categories of potential pitfalls. The first one involves RMDs. These are "required minimum distributions" that you are compelled to take from certain types of retirement accounts. What's the pitfall here and how can you avoid it?

Benz: Well, the big pitfall is forgetting to take your RMD, because the tax penalty is very onerous; you will owe 50% of what you should have taken, but didn't. So, you definitely want to make sure you take that RMD.

A lot of seniors and retirees like to automate those RMDs. So, they have that money come right out of their IRA at the end of the year, so they don't miss the RMD. It also ensures that it's calculated correctly. So, you have to calculate the right amount.

Another thing, though, to think about rather than automating is to think about being strategic when taking RMDs. So, retirees may actually want to look at things that they wanted to sell anyway and think about taking their RMDs from those holdings, rather than taking a flat amount across all the IRAs, even ones that you like and want to hold.

Stipp: So second one, the second pitfall is related to RMDs somewhat, and it has to do with the order of withdrawal. So, it sounds like you have to take RMDs. But more broadly, as you are thinking about where you take money from, how can you avoid a pitfall here?

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