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SNov 13, 2013

Required Minimum Distributions Are A Good Thing

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Q. My husband and I currently have over $600,000 in 403(b) and IRA accounts in American Funds (Washington Mutual, New Perspective, ?Euro-pacific, and New Economy). I turn 70 in January. He turns 70 in March. We have filled out the paperwork?to have American Funds figure out our required minimum distribution and we plan to take it in monthly increments. Fortunately, we have a decent?retirement income and we want to leave the money in the funds as long as possible.

I have the paperwork filled out to start the distributions in January 2014. My question is - Is this the correct time to start withdrawing the distributions or could/should we wait until we turn 70 1/2. I know this isn't an earth-shattering decision, but I want to do the correct thing and I also want to be certain to avoid any penalties. —R.O., by email

A. You will both turn 70 1/2 in 2014 and you appear to be taking your required minimum distributions (RMDs) based on the value of your accounts at the end of 2013, so you are taking the correct action. While the first payment could be delayed until April 1 of the year following the year you turn 70 1/2, you would be required to take another RMD at the end of the same year. This would double your withdrawals for the year and pile a lot of taxable income into the same year. As a consequence, some or all of that additional income could face higher tax rates than what you are planning to do.

Q. My wife and I were talking about how we approach Social Security, as we are getting to that point. We will both turn 62 next year, in September and October. I guess I will work until I die, but at least to age 65 or 70. I have always heard that the wife, who is not working, should start taking Social Security benefits at 62 and that the working husband should wait until 66 or longer, if possible.

Here are our estimated benefits. My wife will have a benefit of $1,032 a month at 62 and $1,371 a month at 66. I’ll have a benefit of $1,810 a month at 62, $2,411 at 66 and $3,183 at 70.

So what should we do? If she starts at 62, do I get anything as a spousal benefit? Or do I not get a benefit because I’m still working? If she starts at 62 and then I start at 66, does she still receive $1,032 or does she move up to half of mine as a spousal benefit? —D.B., San Antonio, TX

A. At age 62 your wife can file for benefits under her work record or yours, whichever is greater and even if you are still working. From the figures you provided, her work record will provide the higher benefit, so she should take that. You should defer taking benefits based on your record until you are at least full retirement age. The longer you defer, the higher the ultimate benefit will be for you— and for your spouse, if she survives you.

If you were both the full retirement age (FRA), it would be possible for you to file for benefits under your wife's record, but continue to defer benefits under your record until your actual retirement age. For those born between 1943 and 1954 the FRA is 66. Since you aren't of full retirement age, however, this option isn't open to you.

As a practical matter, little may be lost due to the benefit reduction provisions if you take benefits early but still have earned income over certain amounts. If you took spousal benefits under her record you would be entitled to 75 percent of half of her benefit. That would be 75 percent of $516 or $387 a month. That benefit, however, would be reduced by $1 for every $2 you earn. So if you earned $774 a month, or more, you'd receive no benefit.

This is not a punishment. While the many and complicated rules of Social Security can make you say, "Why?" it's always good to remember that the fundamental purpose of Social Security is to provide an income safety net for older Americans. It's a system to be respected, not worked or gamed, as many people now seem to see it.

Filed Under: Social Security, Required Minimum Distributions