In a recent meeting with a client we were asked whether it was better for them to take their IRA required minimum distributions early in the year or towards the end of the year. Seniors who have reached the age of 70 and ½ must take their first IRA distribution by April 1st of the year following the year they reach age 70 and ½. For the years thereafter, they must take their minimum distributions by December 31st of each year.

The required minimum distribution (RMD) each year is based on the IRA balance on December 31st of the previous year and the life expectancy the IRA owner reaches in the year of distribution.

Obviously if funds are needed to live on, the distribution should be taken whenever it’s needed. Generally, however, it makes sense to leave assets in an IRA for as long as possible, so that they can continue to grow tax free. That assumes, of course, that over the long run, the value of the assets will grow.

On the surface, for the distributions required in a given year, it seems that it probably doesn’t make that much difference whether the distribution is taken early in the year or later, unless the distribution is reasonably sizable. Even then, it would be better to take it earlier, if the market dropped significantly during the year, and better to take it later, if the market rose during the year. But who can predict what will happen at the beginning of any given year?

Given that over a very long time horizon, market values have increased, it probably does make sense to take distributions later in the year rather than earlier. While any yearly gain from waiting may be minimal, and some years may result in losses, over a retirement of twenty or more years, there should be some benefit to taking the distributions later in the year.

Confused yet? To make matters more complex, a recent MorningstarAdvisor online article titled “IRS Stepping Up IRA Enforcement” (9-10-10) by Natalie Choate, considered the “guru” of retirement benefit distribution planning, warned that the IRS is going after those who fail to take their required minimum distributions. The penalty for insufficient withdrawals is 50%. In order to minimize the chance of an audit, Natalie’s article concludes that those reaching the age of 70 and ½ are best to take their first distribution in the year they turn 70 and ½, rather than delaying to the year following (prior to April 1st). She also points out that those nearing their expected life expectancy (who can be sure of that?) can minimize audit possibilities by taking their distributions early each year.

Clearly, if you take care to withdraw the proper amount, you have no fear of an audit (unless you’ve stretched other IRS rules). In any case, if you are unsure of how much to withdraw or when, seek professional help.