Tapping in to your IRA?

If you’re planning on withdrawing funds from a taxable IRA or other retirement accounts, with some advanced planning, it’s possible to minimize or possibly avoid taxes, as long as you consider some of the following points:

Before Age 59.5 – Early Distributions – If you withdraw funds before reaching age 59 ½, you will pay a 10% early withdrawal penalty in addition to the income tax on the IRA distribution, unless what is referred to as the substantially equal payment exemption is utilized. Under this exception, an early retiree can begin taking substantially equal payments at least once a year over the owner’s life or joint lives of the owner and designated beneficiary. The payments must not cease before the end of the five-year period beginning with the date of the first payment, BUT after the taxpayer reaches age 59.5.   

Distributions From Age 59.5 to 70.5 – After age 59.5, you can take out as much or as little from your IRA as much or as little in any year until reaching age 70.5. This liberty allows you do plan your distributions in order to minimize taxes. With this technique, you can match distributions to no- or low-income years. 

Age 7.5 and Older – Once you’ve reach age 70 ½, you must withdraw at least a minimum amount from your Traditional IRA each year. If you fail to take a distribution in the year age 70 ½ is reached, you can avoid a penalty by taking that distribution no later than April 1st of the following year.  Keep in mind that means you must take two distributions in the following year, one for the year in which they reached age 70 ½ and one for the current year.  Distributions that are less than the required minimum distribution for the year are subject to a 50% excise tax (excess accumulation penalty) for that year on the amount not distributed as required. The excess accumulation penalty can generally be abated by following IRS abatement procedures. 

Quite frequently, taxpayers have multiple IRA accounts in addition to one or more types of other retirement plans. This gives rise to a commonly asked question, “Must I take a distribution from each individual account?” For purposes of the annual required minimum distribution, a separate distribution must be taken from each type of plan. However, you may have multiple accounts for each type of plan, which for tax purposes are treated as one plan. For example, if you have three IRA accounts, the three separate accounts are treated as one for tax purposes, and the distribution can be taken from any combination of the accounts.

Generally, the minimum amount that must be withdrawn in a particular year, after reaching age 70 ½, is the total value of all IRA accounts (as determined on December 31st of the prior year) divided by a factor based on the owner’s age from the table below, illustrated for ages 70 – 87 only (the complete table goes to age 115 and over).  

Considerations for the Estate and Beneficiary – When planning your distributions, keep in mind that the value of your undistributed IRA account will be included in your gross estate when you pass on, and depending upon the size of your estate, it may be subject to inheritance taxes. In addition, the inherited IRA distributions will be taxable to the individual who inherits the IRA. Therefore, it could be appropriate to utilize the IRA funds first and then dip into other assets after the IRA funds have been depleted. On the other hand, funds left in an IRA do continue to accumulate tax-free which might be better in certain circumstances.

If you need assistance with your tax planning needs or would like to develop an IRA distribution plan, please contact the office for an appointment.