Don't Make This IRA Mistakehttp://www.fool.com/retirement/iras/2010/12/15/dont-make-this-ira-mistake.aspx Dan Caplinger
December 15, 2010
Nobody wants to pay taxes unless they absolutely have to -- especially those who are already retired and living on a fixed income. But like it or not, if you turned 70 before June 30 of this year, then you need to start taking money out of your IRA and 401(k) accounts -- or else face consequences you're not going to want to pay.
Paying the piper
As a result, most of the time, it pays to keep that retirement money untouched for as long as you can. But because Congress was smart enough to realize that investors would do exactly that, the laws governing retirement accounts include provisions that make you start taking money out of them, even if you don't need or want the money at that point. The law refers to taking required minimum distributions or RMDs, and although lawmakers gave investors a break from the RMD rules in 2009 following the market meltdown, they're back with a vengeance this year.
What do you have to do?
Second, you have to figure out how much you need to withdraw. Calculating the amount requires you to add up all your retirement account values as of the end of 2009 and then divide by an age-based life expectancy factor provided by the IRS. This factor changes every year, but if you're in your 70s, you can expect to have to withdraw around 4% to 5% of your total retirement account assets.
To make sure you take your RMD, the IRS hits those who don't with a huge penalty: 50% on the amount you should have withdrawn. So you definitely don't want to goof this law up.
Investing for RMDs
One answer is to invest in dividend-paying stocks with yields high enough to match up with your RMD factor. Altria Group (NYSE: MO ) , Exelon (NYSE: EXC ) , and Verizon (NYSE: VZ ) are all solid stocks with a history of financial strength, allowing even retirees to feel pretty comfortable owning them. And because each of them has a dividend yield above 5%, their dividend payments will go a long way toward getting your RMD paid for.
But going overboard can be a mistake. Cellcom Israel (NYSE: CEL