Hold Off on Your IRA Distribution

EDITOR'S NOTE: This story has been superseded by the Treasury Department's decision on December 18 to NOT grant relief for 2008 required minimum distributions. For more on the decision, read Treasury to Seniors: Drop Dead.

I understand that Congress has passed a law that would suspend IRA required minimum distributions for 2009 and that there's still a chance that the RMD rules could change for 2008, too. I'd like to hold off on taking my 2008 required distribution for as long as possible, in case the government does offer some sort of RMD relief for 2008. But because it's getting late in the year, I don't want to miss the deadline and pay a penalty. How long can I wait?

You're smart to wait to take your required minimum distributions because the rules could change in the next few days. Generally, people must start taking required distributions from their IRAs in the year after they reach age 70½, with annual withdrawal amounts -- and tax bills -- based on their life expectancy and their IRA account balance as of December 31 of the previous year. But because so many people's account values have shrunk since December 2007, their withdrawals are based on a balance that isn't there anymore.

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Congress just passed a law suspending the RMD requirements for 2009, but the rules have not been changed so far for 2008. So if you don't need the money to live on, it can pay to wait a few extra days to see what happens.

Contact your IRA administrator to find out how many days' notice it would need to process your RMD request. The good news is that you still have plenty of time to wait at several of the large brokerage firms and mutual fund companies.

The timeframe can vary depending on the administrator's processing time, how you've requested the withdrawal, and whether you have to settle a fund or stock trade first. Vanguard, Fidelity, Schwab and T. Rowe Price let you take required minimum distributions from your IRAs as late as December 31, as long as don't need to sell stocks or funds to make the cash available first.

The specifics vary depending on how you make the request. Vanguard customers can take their required minimum distributions as late as 4 p.m. on December 31 if they submit their request online (midnight on December 31 for Schwab customers). Vanguard's deadline is the same if you're making a transaction over the phone, but the company recommends calling by December 29 or 30 instead, in case you have any trouble getting through on the phone line or if there is a question about your instructions. Customers who submit their requests through the mail should allow at least seven days for the request to arrive. Even then it could be delayed if you haven't submitted complete information (you can print a distribution form from the Vanguard Web site so there is less room for error).

T. Rowe Price customers can also wait until the last minute if they visit an Investor Center and submit the request in person.

You'll need to start the process earlier if you must sell mutual funds or stocks to make the cash available for withdrawal. Mutual fund trades can take one to three days to settle, and stocks take three days to settle. If you're selling mutual fund shares that take one day to settle, for example, you'd need to make the trade by December 30 so you can withdraw the cash on December 31. Also keep in mind that the stock exchanges will be closed for Christmas.

You may also need to start earlier if you'd like the IRA administrator to calculate the RMD for you. T. Rowe Price requests ten business days to ensure that the calculation is done properly and on time.

If you plan to wait before taking your RMD, get everything in order beforehand. Calculate how much you'll need to withdraw, decide which account to tap and which shares you'd like to sell, and find out what forms you need to submit so you're ready to make the sale if the laws haven't changed as 2009 approaches.

A few other ways to prepare: "Figure out what options you have regarding tax withholding and how these options impact any decisions you make," says T. Rowe Price spokesperson Heather McDonold. "If you choose to have taxes withheld, how much do you want to have withheld? What are the advantages and disadvantages of each choice?"

McDonold also recommends finding out what information you need to provide to have the amount you withdraw deposited into another account. "If you want the RMD deposited to your bank account, for example, do you have the bank routing number and account number and title?" If you don't have transfer instructions on file, you may have to visit the institution to sign a form or provide a required document with a signature guarantee, she says.

And don't make any assumptions about the rules and timeframe -- they can vary depending on your account and your administrator. Call now to get the details.

For more information about the required distribution rules, see Dealing With Required IRA Distributions.