Q. I am 73 and retired. In 2008 I had to take my first Required Minimum Distribution from a mutual fund in an IRA and from a 401(k). The combined total was $28,353, and I ended up owing $1,917 on my tax return. For 2009 the RMD requirement was waived so I did not take my RMD. Now it’s 2010 and I don’t want to repeat 2008.

For 2010 I have to take $29,032. That will bring my total income to $54,482. Should I have 15 percent withholding taken from the RMD? In 2008 I took 10 percent. Is there an easy way to calculate this, so I do not have to owe so much money? Also, since my 401(k) is a fixed account, it is earning about 5.25 percent and my mutual fund is subject to losses. Should I take the whole RMD from my IRA and leave the 401(k) to grow, or should I try to recoup my losses from the mutual fund and divide the withdrawal from both? —R.K., Boston, MA

A. Sadly, it is a complicated calculation. Whether you should have 10 percent or 15 percent deducted from your RMD depends on your tax bracket and that, in turn, depends on your other sources of income (such as Social Security or a pension) and whether you are filing a joint or single return.

Since you ended up owing $1,917 after your 2008 RMD it’s a good bet that you should have 15 percent withheld. You should then visit with your tax accountant to figure out what you should be paying in estimated income taxes so you can avoid interest and penalties.

If the $25,450 of income beyond the RMD you have is from Social Security, and you are single, it is very likely that your RMD triggers taxation of some of your Social Security benefits. This will raise the effective tax rate on the RMD because not only will each additional RMD dollar will be taxable but it will also cause 50 cents or 85 cents of your Social Security benefits to be treated as taxable income.

There is nothing you can do about this. Consider it a “gift” from the smooth folks in Washington who put this delayed bomb in the 1984 Social Security reform. The formula that is used to calculate whether your Social Security benefits are taxable is one of the few things in our tax code that is not indexed for inflation. As a consequence, few experienced the tax on benefits in 1984 but it affects more than 30 percent of all retirees today. Think of it as a bi-partisan gift from your trusted friends in Congress.

Unless you want to change your portfolio composition, you should withdraw proportionate amounts from each account.

Q. I have a question regarding my IRA and 401(k) accounts. This year I reached 70 ½. I am told that I have to start taking money out of these accounts. What type of account should I put this money into once it has been distributed? I am currently living on Social Security and a state pension. The IRA and 401(k) funds are to be used for a nursing home, if needed. —E.M.W., Austin, TX

A. If you don’t need the money for supporting your standard of living, one option is to treat the RMD as a Roth conversion. Open a Roth IRA, and reinvest the after-tax proceeds. In the Roth account all future growth and distributions will be tax-free.

Another option is to start building a cash reserve account. It won’t earn much in interest and what it does earn will be taxable, but it will provide you with readily accessible cash if you need the money for vacations or health emergencies. The advantage of having a cash reserve account is that you can spend that money without creating a “taxable event.” Any money taken from your IRA or 401(k) accounts is taxable income.

Finally, if you turned 70 ½ this year (2010) you will need to make the Required Minimum Distribution before the end of the year. The amount will be determined by the value of the account at the end of 2009 and the formula used for calculating your RMD. Do this before year end.

Important correction and clarification for this column:

It is incorrectly stated in the column above that retirees over 70 ½ can convert required minimum distributions (RMDs) from IRA and 401(k) accounts into Roth IRAs. To clarify, only after the RMD has been completed and taxes paid, can you start a conversion of the remaining balance.

The column also suggests that a person should take their Required Minimum Distribution before the end of the year in which they turned 70 ½. The rules actually allow a person to take their first RMD by April 1 of the year following the year in which they turn 70 ½.

This would not be tax-wise, however, because the second distribution would have to be taken by the end of the same year. In effect, the person would be taking two taxable distributions in the same tax year. Here is how this rule is stated in the IRS regulations:

"An account owner must take the first RMD for the year in which he or she turns 70 ½. However, the first RMD payment can be delayed until April 1st of the year following the year in which he or she turns 70 ½. For all subsequent years, including the year in which the first RMD was paid by April 1st, the account owner must take the RMD by December 31st of the year."