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Required minimum distributions are a good thing

Q: My husband and I currently have more than $600,000 in 403(b) and IRA accounts in American Funds (Washington Mutual, New Perspective, Euro-Pacific and New Economy). I turn 70 in January. He turns 70 in March. We have filled out the paperwork to have American Funds figure out our required minimum distribution, and we plan to take it in monthly increments. Fortunately, we have a decent retirement income and want to leave the money in the funds as long as possible. I have the paperwork filled out to start the distributions in January 2014. My question: Is this the correct time to start withdrawing the distributions, or could/should we wait until we turn 70½? I know this isn’t an earth-shattering decision, but I want to do the correct thing, and I also want to be certain to avoid any penalties.

A: You will both turn 70½ in 2014, and you appear to be taking your required minimum distributions (RMDs) based on the value of your accounts at the end of 2013, so you are taking the correct action.

While the first payment could be delayed until April 1 of the year following the year you turn 70½, you would be required to take another RMD at the end of the same year. This would double your withdrawals for the year and pile a lot of taxable income into the same year. As a consequence, some or all of that additional income could face higher tax rates than what you are planning to do.

Q: My wife and I both turn 62 next year, in September and October. I will work until I die, but at least to age 65 or 70. I have always heard that the wife, who is not working, should start taking Social Security benefits at 62 and that the working husband should wait until 66 or longer, if possible. Here are our estimated benefits: My wife will have a monthly benefit of $1,032 at 62 and $1,371 at 66. I’ll have a monthly benefit of $1,810 at 62, $2,411 at 66 and $3,183 at 70. If she starts at 62, do I get anything as a spousal benefit? Or do I not get a benefit because I’m still working? If she starts at 62 and I start at 66, does she still receive $1,032, or does she move up to half of mine as a spousal benefit?

A: At 62, your wife can file for benefits under her work record or yours, whichever is greater, and even if you are still working. From the figures you provided, her work record will provide the higher benefit, so she should take that. You should defer taking benefits based on your record until you are at least full retirement age. The longer you defer, the higher the ultimate benefit will be for you — and for your spouse, if she survives you.

If you were both the full retirement age (FRA), it would be possible for you to file for benefits under your wife’s record, but continue to defer benefits under your record until your actual retirement age. For those born between 1943 and 1954, the FRA is 66. Since you aren’t of full retirement age, however, this option isn’t open to you.

As a practical matter, little may be lost due to the benefit reduction provisions if you take benefits early but still have earned income over certain amounts. If you took spousal benefits under her record, you would be entitled to 75 percent of half of her benefit. That would be 75 percent of $516, or $387 a month. That benefit, however, would be reduced by $1 for every $2 you earn. So if you earned $774 a month or more, you’d receive no benefit.

This is not a punishment.

Correction: In my answer to a question in my Oct. 17 column about when to start taking Social Security benefits, I gave the Web address for an online benefit calculator that I erroneously said was free. It is not free; the cost is $40 for a one-year license that will allow you to store your earnings and other data on the website.


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