Tax Tip of the Week
October 16, 2006

If so, you may have a decision to make before year-end. That's because if you have a traditional IRA, you must start taking required distributions each year once you reach that age. But a special rule allows you to postpone making your first withdrawal. That's where the decision comes in.

You don't have to make your first withdrawal until April 1 of the year after you reach age 70½. So if you reached 70½ in 2006, you could postpone your first distribution until April 2, 2007 (April 1, 2007 falls on a Sunday). And because withdrawals are usually taxable, that might be tempting. Why pay taxes this year when you can postpone them to next year?

But there's a catch. If you postpone your 2006 withdrawal until April 2007, you'll still have to make your 2007 withdrawal before the end of next year. That means you face two taxable distributions in the same year. And that could push your taxable income into a higher tax bracket. It could even put you over the threshold for certain tax breaks.

So don't fall into the trap of automatically postponing your first required IRA withdrawal. Sometimes it makes sense; sometimes it doesn't. The only way to be sure is to take a thorough look at your two-year tax picture.

Note that unless you're still working, this deadline also applies to other retirement accounts (except Roths). If you or a relative faces this situation, please contact our office. We can evaluate your situation and help you make the best decision.

Questions for our Financial Expert?
E-Mail us at: finance@ClevelandSeniors.Com