Published: Monday, July 19, 2010, 8:00 AM

Q. I will be retiring March 31, 2011. I will be 70 years and 9 months old. I have a 401(k) and 403(b) retirement plan from work. I know that in 2011 I will have to start taking distributions from these plans based on a formula. In the event I do not need to use all the disbursements for living expenses, where can I can conservatively invest these funds until needed? Can any of these funds be deferred from federal and state income taxes?

— Soon-to-be retired

A. Best of luck with your upcoming retirement. Here’s the lowdown on your coming distributions: You are correct that as of the year in which you turn 70½ you are required to start taking your Required Minimum Distribution (RMD) from your retirement accounts. You didn’t say anything about an IRA, so we’ll discuss employer plans here.

"If you are not a 5 percent or more owner in the company, you do not have to take your RMD while you are still employed," said Reed Fraasa, a certified financial planner with Highland Financial Advisors in Riverdale. "However, once you retire, you will need to take the current year only."

Since you are retiring in March 2011 and you will be at least 70½, your employer will be required to take the RMD for you, Fraasa said. The amount will be based on the account value as of Dec. 31, 2010, and the age used to determine the ratio is your age as of Dec. 31, 2011, at which time you’ll be 71.

"Unless your spouse is more than 10 years younger than you, the amount the employer will distribute in the form of a RMD will be 1/26.5 of the total balance," Fraasa said. "Expressed as a percentage, that is 3.77 percent of the total balance on December 31, 2010."

The employer will have to withhold 20 percent for taxes.

In 2012 and thereafter, Fraasa said if you transfer the funds to an IRA, the IRA custodian will process your annual RMD based on the balance as of the end of the prior year and a factor based on your age at the end of the current year.

If you don’t need to spend the money, the most appropriate investment depends upon three things, said Howard Hook, a certified financial planner and certified public accountant with Access Wealth Planning in Roseland: Your ultimate goal for the money, the time horizon and your risk tolerance.

Hook says if you need the money in 10 years or less, and you need to be sure the money is there, then a bond or cash would be most appropriate. For a longer time horizon, consider putting at least some in a well-diversified equity mutual fund.

Whether to invest in tax-free or tax-deferred investments depends on your tax bracket, Hook said, but you will still have to pay federal and possibly state income tax on the IRA distribution.

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