How do I Keep From Taking Out a Certain Amount of My IRA After 70.5?

If you don't need the required withdrawal from your traditional IRA, consider converting it to a Roth IRA.

If you have a traditional Individual Retirement Account (IRA), IRS regulations mandate withdrawals from the IRA once an individual reaches 70.5 years of age. If withdrawals are not taken, the IRS will assess penalties on the amount that should have been withdrawn. The only way to avoid mandatory withdrawals from an IRA is to convert it from a traditional IRA to a Roth IRA. While converting to a Roth IRA means you will no longer have to take required distributions, you will have to pay income taxes on the amount you convert. Once converted to a Roth IRA, earnings can be withdrawn on a tax-free basis.

Things You'll Need

• Contact information for your IRA custodian

Instructions

1. Notify the custodian of your IRA that you would like to convert it from a traditional IRA to a Roth IRA. The custodian will manage the conversion process, and they will mail a form to you that will need to be included when you file your income tax return the following April. The amount that you convert will be considered ordinary income, and you will be responsible for paying the income tax on this amount in addition to any other income you have for the year.

2. File your income tax return, including the information on the form from your IRA custodian. If you fail to report this information on your income tax return, you will incur penalties and interest charges.

3. Pay the income tax due. If you can, pay the taxes out of savings that do not include the converted IRA. This will help the Roth IRA continue to increase in value. If you happen to convert to a Roth IRA in 2010, you have the option of splitting the income tax between your 2010 and 2011 tax returns. If you convert to a Roth IRA any other year, all of the tax will be due in the same year.

Tips & Warnings

• If you think there will be a large income tax liability, consider converting your IRA in 2010, when you can split the tax liability between 2010 and 2011. Speak with a knowledgeable financial adviser if you are unsure about whether a Roth conversion makes sense.

• Like all Roth IRAs, there is a 5-year waiting period before earnings can be withdrawn on a tax-free basis. Contributions can be withdrawn prior to this, but there may be a penalty if you are younger than 59.5 years old.

• Converting to a Roth IRA can create a large income-tax liability.

References

• Roth IRA: Roth IRA vs. Traditional IRA
• Good Financial Cents: 2010 Roth IRA Conversion Rules
• Internal Revenue Service: Publication 590 - Individual Retirement Arrangements