Morningstar Advisor - Spring 2008 - 37

year. True, taking it in the first year avoids a doubling of required distributions in the following (age-71½) year, but a client may owe lower taxes on a double distribution in the second year than on two smaller distributions taken over two years. Take, for example, a person who is retiring in her age-70½ year and is earning a high salary during that year. That income will not exist in the following year, perhaps putting her in a lower tax bracket. Do take into account the taxability of Social Security benefits. A married person filing Do pay the RMD late in the year and do use IRS Form W4-P (request for withholding from Do distribute a mutual fund that is closed to new investors (rather than selling the fund and distributing cash) to preserve the client’s access. Do distribute an asset you consider undervalued, so postdistribution gain will be jointly whose “provisional income” (regular income plus municipal-bond interest and half of Social Security benefits), before taking any RMDs, is less than $44,000 will have a lower percentage of Social Security benefits subjected to income tax than someone whose provisional income exceeds that amount. (The number is $32,000 for a single individual.) For people in these ranges, postponing the first year’s RMD could also delay the inevitable date when taking RMDs starts making Social Security benefits more taxable; or in some cases, taking the first year’s RMD in the first year could minimize the taxability of benefits by keeping both years’ distributions under the threshold levels. Similar calculations and projections need to be made for clients whose income levels put them in the Alternative Minimum Tax exemption phaseout range, or otherwise make them subject to AMT in one or both of the years. Many more factors could have an impact on this decision; neither “always postpone” nor “never postpone” is the right answer. retirement plan distribution) to have the annual tax obligation paid by withholding from the RMD (to the extent the RMD equals the estimated tax obligation). Withheld income taxes are credited to your client’s estimated tax obligation as if the withheld taxes were paid in equal installments on April 15, June 15, Sept. 15, and Jan. 15, even though the government does not receive the withheld taxes until late in the year. The client’s IRA gets a few extra months’ investment income from the money that otherwise would have been paid in estimated taxes. Do inform the client of the risk of this approach. If the client dies before the capital gain rather than ordinary income (if the appreciation occurs inside the IRA). Do include accrued bond interest in the “fair market value” of bonds that are distributed. Do distribute hard-to-value assets. (See strategy No. 2, Be Careful with Hard-toValue Assets.) withholding distribution occurs, the estate will owe a penalty for underpayment of estimated income tax. Take RMD Early, or Late, in the Year Do take the RMD early in the year if using strategy No. 2. Do take it early in the year just to get it over with. All will be grateful for this if the 6 Distribute Assets in Kind The easiest way to pay RMDs is in cash. Cash is easy to transfer and creates no valuation issues. Do sell assets inside the IRA to enable a cash distribution of the RMD if you need to sell the assets anyway for investment reasons. 5 client becomes ill or otherwise stressed later in the year; if he dies, his heirs will be grateful they don’t have to worry about completing that year-of-death RMD. Do take the RMD late in the year, however, if using strategy No. 4, Be Wise about Withholding Income Taxes. Do take the RMD late in the year to take Do save commissions, however, by paying advantage of any midyear tax law changes. 4 Be Wise about Withholding Income Taxes If clients do not need their RMDs to pay living expenses and have to pay estimated taxes: the RMD “in kind” if there is no cash in the account and no investment reason to raise cash. Distribute assets having a fair market value equal to the RMD. That value is taxable to the client as ordinary income and becomes the basis in the distributed asset to measure future capital gain or loss. Which asset should your client distribute? The “qualified charitable distribution” strategy allowed in 2006 and 2007 was created by Congress in August 2006. A client who had already taken her RMD for 2006 could not use the qualified charitable distribution to satisfy her RMD. Do take the RMD early in the year if you are trying to minimize the IRA value relative MorningstarAdvisor.com 37
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Morningstar Advisor - Spring 2008

Table of Contents for the Digital Edition of Morningstar Advisor - Spring 2008

Morningstar Advisor - Spring 2008
Contents
Letter from the Editor
Inbox
Do You Use Annuities with Living Benefit Guarantees?
Managers Who Actively Enrich Shareholders
Staying Out of the Silos
Investment Briefs
Let’s Not All Become Fundamental Indexers Just Yet
Volatility Potential
Adding the Income Dimension
Do’s and Don’ts of RMDs
An Attractive Yield is Only Skin Deep
Mutual Funds Get in the Game
Beyond Target Date
The Last Holdout
A Bird of a Different Feather
First-Class Thinker
Sleep Like a Baby
Is Health Care Immune to a Recession?
Anatomy of a Mutual Fund Disaster
Embrace Your Inner Contrarian
Risks Worth Taking
Mutual Fund Analyst Picks
Undervalued Stocks
Most Popular Variable Annuities
New at Morningstar and on MorningstarAdvisor.com
Back to the Garden
Morningstar Advisor - Spring 2008 - Intro
Morningstar Advisor - Spring 2008 - Morningstar Advisor - Spring 2008
Morningstar Advisor - Spring 2008 - Cover2
Morningstar Advisor - Spring 2008 - 1
Morningstar Advisor - Spring 2008 - 2
Morningstar Advisor - Spring 2008 - Contents
Morningstar Advisor - Spring 2008 - 4
Morningstar Advisor - Spring 2008 - 5
Morningstar Advisor - Spring 2008 - 6
Morningstar Advisor - Spring 2008 - Letter from the Editor
Morningstar Advisor - Spring 2008 - 8
Morningstar Advisor - Spring 2008 - Inbox
Morningstar Advisor - Spring 2008 - Do You Use Annuities with Living Benefit Guarantees?
Morningstar Advisor - Spring 2008 - 11
Morningstar Advisor - Spring 2008 - Managers Who Actively Enrich Shareholders
Morningstar Advisor - Spring 2008 - 13
Morningstar Advisor - Spring 2008 - 14
Morningstar Advisor - Spring 2008 - Staying Out of the Silos
Morningstar Advisor - Spring 2008 - 16
Morningstar Advisor - Spring 2008 - 17
Morningstar Advisor - Spring 2008 - Investment Briefs
Morningstar Advisor - Spring 2008 - 19
Morningstar Advisor - Spring 2008 - 20
Morningstar Advisor - Spring 2008 - 21
Morningstar Advisor - Spring 2008 - Let’s Not All Become Fundamental Indexers Just Yet
Morningstar Advisor - Spring 2008 - 23
Morningstar Advisor - Spring 2008 - 24
Morningstar Advisor - Spring 2008 - 25
Morningstar Advisor - Spring 2008 - Volatility Potential
Morningstar Advisor - Spring 2008 - 27
Morningstar Advisor - Spring 2008 - 28
Morningstar Advisor - Spring 2008 - 29
Morningstar Advisor - Spring 2008 - 30
Morningstar Advisor - Spring 2008 - 31
Morningstar Advisor - Spring 2008 - Adding the Income Dimension
Morningstar Advisor - Spring 2008 - 33
Morningstar Advisor - Spring 2008 - 34
Morningstar Advisor - Spring 2008 - 35
Morningstar Advisor - Spring 2008 - Do’s and Don’ts of RMDs
Morningstar Advisor - Spring 2008 - 37
Morningstar Advisor - Spring 2008 - 38
Morningstar Advisor - Spring 2008 - 39
Morningstar Advisor - Spring 2008 - An Attractive Yield is Only Skin Deep
Morningstar Advisor - Spring 2008 - 41
Morningstar Advisor - Spring 2008 - Mutual Funds Get in the Game
Morningstar Advisor - Spring 2008 - 43
Morningstar Advisor - Spring 2008 - 44
Morningstar Advisor - Spring 2008 - 45
Morningstar Advisor - Spring 2008 - 46
Morningstar Advisor - Spring 2008 - Beyond Target Date
Morningstar Advisor - Spring 2008 - 48
Morningstar Advisor - Spring 2008 - 49
Morningstar Advisor - Spring 2008 - 50
Morningstar Advisor - Spring 2008 - 51
Morningstar Advisor - Spring 2008 - 52
Morningstar Advisor - Spring 2008 - The Last Holdout
Morningstar Advisor - Spring 2008 - 54
Morningstar Advisor - Spring 2008 - 55
Morningstar Advisor - Spring 2008 - 56
Morningstar Advisor - Spring 2008 - 57
Morningstar Advisor - Spring 2008 - 58
Morningstar Advisor - Spring 2008 - 59
Morningstar Advisor - Spring 2008 - A Bird of a Different Feather
Morningstar Advisor - Spring 2008 - 61
Morningstar Advisor - Spring 2008 - 62
Morningstar Advisor - Spring 2008 - 63
Morningstar Advisor - Spring 2008 - First-Class Thinker
Morningstar Advisor - Spring 2008 - 65
Morningstar Advisor - Spring 2008 - 66
Morningstar Advisor - Spring 2008 - 67
Morningstar Advisor - Spring 2008 - Sleep Like a Baby
Morningstar Advisor - Spring 2008 - 69
Morningstar Advisor - Spring 2008 - 70
Morningstar Advisor - Spring 2008 - 71
Morningstar Advisor - Spring 2008 - 72
Morningstar Advisor - Spring 2008 - 73
Morningstar Advisor - Spring 2008 - Is Health Care Immune to a Recession?
Morningstar Advisor - Spring 2008 - 75
Morningstar Advisor - Spring 2008 - Anatomy of a Mutual Fund Disaster
Morningstar Advisor - Spring 2008 - 77
Morningstar Advisor - Spring 2008 - Embrace Your Inner Contrarian
Morningstar Advisor - Spring 2008 - 79
Morningstar Advisor - Spring 2008 - Risks Worth Taking
Morningstar Advisor - Spring 2008 - 81
Morningstar Advisor - Spring 2008 - 82
Morningstar Advisor - Spring 2008 - Mutual Fund Analyst Picks
Morningstar Advisor - Spring 2008 - 84
Morningstar Advisor - Spring 2008 - 85
Morningstar Advisor - Spring 2008 - 86
Morningstar Advisor - Spring 2008 - 87
Morningstar Advisor - Spring 2008 - 88
Morningstar Advisor - Spring 2008 - Undervalued Stocks
Morningstar Advisor - Spring 2008 - 90
Morningstar Advisor - Spring 2008 - 91
Morningstar Advisor - Spring 2008 - Most Popular Variable Annuities
Morningstar Advisor - Spring 2008 - 93
Morningstar Advisor - Spring 2008 - 94
Morningstar Advisor - Spring 2008 - New at Morningstar and on MorningstarAdvisor.com
Morningstar Advisor - Spring 2008 - Back to the Garden
Morningstar Advisor - Spring 2008 - Cover3
Morningstar Advisor - Spring 2008 - Cover4
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