Your Money: As the year turns, don't forget your distributions

Enjoy the holidays, but remember year-end is fast approaching and it is time to ask yourself and your spouse: Have you taken your minimum required distribution from your retirement accounts?

Most people have not. According to one November 2012 survey by Fidelity, 65 percent of their customers who are retirees had not yet taken their required distributions for the year.

Be warned: This can be a costly mistake and can result in paying out significant tax penalties. So what are you waiting for? It's easy to set up an automatic withdrawal just by calling your broker or retirement account manager.

Beginning in the calendar year following the year you turn 70½, the Internal Revenue Service requires you to withdraw a minimum amount of money each year from your tax-deferred retirement accounts, such as traditional IRAs and 401(k) plans. Otherwise, you pay penalties of up to 50 percent of what is known as your "required minimum distribution." This is why it is important to understand how this works and the timing of distributions.

Deadlines. For traditional IRAs, you must begin taking minimum required distributions at the prescribed age. Let's say you turned 70 1/2 on Nov. 1, 2012. That sets the clock ticking. You must now start taking distributions from your retirement accounts. For your 2012 distribution, the year you turned 70 1/2, the deadline to do so is extended until April 1, 2013. However, for each year after, you must take your distribution by Dec. 31.

Check with your brokerage firm, but most customers must complete distribution transactions by Dec. 31, and allow time for any trades to settle if you are selling securities to raise money and take your distribution.

Tax penalties. Failure to withdraw your required minimum distribution annually by the deadline might result substantial tax penalties. All withdrawals of earnings and pretax contributions are taxed as ordinary income, but if you fail to take the full minimum required distribution, the penalty may be 50 percent of the amount not distributed.

How is your amount determined? Your accountant, financial planner, or broker should help you determine it. Minimum required distributions - required because your savings have appreciated virtually tax free until the mandatory age - are determined by your age, your account balance, and your life expectancy. If you have a spouse more than 10 years younger than you and who is the sole beneficiary for your entire distribution, you can base your minimum on your joint life expectancy.

Eileen Heisman was on her way to New York last week to accept an award for her work at the National Philanthropic Trust, based here in Philadelphia. As president and CEO of the trust, she helped seed the launch of Breast Cancer Deadline 2020 - a campaign to end breast cancer by Jan. 1, 2020. The 2020 campaign is funding testing of vaccines against breast cancer and other cutting-edge research.

But she found time to talk to us about how even ordinary folks can set up what is known as a donor-advised fund for charitable giving.

You don't have to be a 1-percenter to give charitable gifts and you don't have to set up a private foundation, she said.

"A private foundation requires a 5 percent distribution every year, and that can include overhead," she explained.

That means foundations don't always end up giving the bulk of their donations to causes in need, but to support staff and other operating costs.

Instead, she suggests opening a donor-advised fund. Charles Schwab, for instance, requires just $5,000 as a minimum to set up a donor-advised fund account.

With this account, you can donate cash or securities, realize immediate tax benefits, give when it meets your goals, and even manage your donations online.

National Philanthropic Trust's minimum is $25,000 to set up a donor-advised fund account, plus fees.

Make sure to check with your broker to find out whether it offers the service, which generally costs 0.25 percent annually or more.