How to Select the Best IRA Distribution Method

You have two important decisions to make when you open a traditional IRA. One is to name your beneficiary. The other is to select the distribution method to use when your required beginning date (RBD) arrives. Your RBD is defined as April 1 of the year after you turn 70 1/2 years old. The distribution method you have chosen will then be carried out and cannot be changed.

Things You'll Need

• IRS life expectancy tables

Instructions

1. Use IRS tables for IRAs to select the life expectancy of you and your spouse, if he is your designated beneficiary. The label "joint life" factors in the life expectancy of both of you. This causes your IRA to be paid out more slowly and holds its tax-deferred status for a longer term.

2. Make your best estimate about how much money you will need to draw from your IRA in order to live. Having a number in mind can help you decide which method will be right for you and your family.

3. Choose the "recalculation" method of distribution to receive money from your IRA for the remainder of your life. The payments will decrease after the first year. This option is not available to people whose beneficiaries are a nonspouse.

4. Select the recalculation method to provide your spouse with your IRA assets after you die. The payments in this method continue throughout the life of the beneficiary.

5. Receive payouts from your IRA for a specified number of years with the "term certain" method. Your life expectancy is a factor in determining the term. By the end of the term, your entire IRA balance will have been disbursed.

6. Choose the more complicated "hybrid" method of distribution. When the IRA owner dies before reaching his life expectancy, this method allows for a slower payout to the beneficiary than the other two methods.

Tips & Warnings

• Some IRA experts think that the "term certain" distribution method is the best choice because of its practicality. As years of the term pass, the distribution amounts increase. There are no complicated computations to be made, and the timing is often beneficial to aging retirees who may need more advanced medical care later in their lives.

• Do not overlook selecting a distribution method. Some IRA plans default to one of the three methods if you have not chosen one by the age of 70 1/2 years old, at which point it cannot be changed.