If your current income tax rate is higher now than what you anticipate in the future, you may want to consider deferring your retirement plan distribution as long as possible. One way of deferring your distribution is to roll it over to a traditional IRA or another qualified plan; or some employers allow you to leave it in their plan. Not only will you pay less tax, but the amount in the plan will continue to grow tax-deferred. However, be careful to take into consideration the distribution penalty taxes discussed below. If these penalty taxes apply, you may need to accelerate distributions rather than defer distributions.

Minimum Distribution Requirements

There comes a point in your life when it is mandatory that you begin taking distributions from your retirement accounts. That magic age is 70½, when something called minimum distribution requirements kick in. You can postpone distributions from your current employer's retirement plans, (but not from your traditional IRA) if you are still employed even if you are older than 70½ (but not if you are a 5% owner—that is, an owner of more than 5% of your company). Distributions from a Roth IRA can be postponed beyond age 70½ regardless of whether you are employed or not.

You are generally required to take minimum annual distributions from all your qualified retirement plans, 403(b) plans, Section 457 plans, and traditional IRAs no later than April 1 of the year following the year in which you reach age 70½. This doesn't mean you have to take all the money out at once. The required minimum distribution for each year generally equals the retirement plan account balance as of December 31 of the previous year, divided by the applicable life expectancy. The applicable life expectancy is set out in tables published by the IRS, based on your age or the ages of you and your spouse if your spouse is more than ten years younger than you, if that spouse is the sole beneficiary. Note: You can take more than the minimum.

Distributions for following years must be made by December 31 of each year. For example, if you are retired and reach age 70½ this year, you must begin receiving distributions by April of next year. Regardless of whether you delay your current year distribution, you must take next year's distribution by December 31 of next year. This will force you to include, in next year's taxable income, required distributions for both this year and next year.

IMPORTANT NOTE: If the distribution you take is less than the minimum amount required, you will be subject to an excise tax totaling 50% of the difference between the required distribution and the amount you withdrew. For example, if you took a distribution of $10,000 and should have taken $20,000, then the excise tax would be $5,000 (the shortfall of $10,000 x 50%). So, remember to take at least the minimum distributions or you could stand to lose quite a bit of money.