Retirement & Eldercare

Planning your Retirement? Tips for your IRA Withdrawals for every age

Planning your Retirement? Tips for your IRA Withdrawals for every age

Taxpayers who've been contributing to taxable IRAs and other qualified plans in preparation for retirement have a number of options available to them when it comes time to start making withdrawals. With careful advance planning, not only can you reduce your taxes, you may even be able to avoid paying them entirely. 

An Option for Distributions Before 59 ½ - Generally speaking, withdrawals from an IRA are subject to a 10% early withdrawal penalty, applicable state penalties, and are fully taxable if the owner requests distribution before they turn 59 ½. However, an exception called the substantially equal payment exemption can be used to allow an early retiree to take payments before that without penalty. In order to qualify, the owner and designated beneficiary must take at least one annual substantially equal payment per year. These payments must continue until after the taxpayer reaches 59 ½ and must be taken for a minimum of five years from the time of the first payment.

Distributions between 59 ½ and 70 ½ ­- From the time a taxpayer has reached the age of 59 ½ until they reach the age of 70 ½, they are able to take as many distributions from their IRA as they would like, in whatever year they would like. This flexibility permits strategic tax planning, allowing them the option of taking out larger distributions on years when their income is low and avoiding distributions that would bump them into a higher tax bracket.

Distributions after 70 ½ - Taxpayers who own Traditional IRAs are required to take a minimum amount out of their funds each year after they've turned 70 ½. Failure to do so, or even to take out less than the required minimum for that year, results in a 50% excise tax for that year on the amount that they were supposed to withdraw and didn't. There is a way to avoid this penalty – taking the distribution in the following tax year no later than April 1st eliminates the fee. The downside to this option is that there will end up being two distributions in that year. There is also an excess accumulation penalty, but there are IRS abatement procedures that can be used.

It is very common for taxpayers to get confused about the required minimum distribution rules, particularly when they have multiple IRA accounts. In order to minimize the number of transactions that need to be taken for multiple accounts, the IRS considers all of a taxpayer's same-type IRAs as a single account from which only one distribution needs to be taken each year. Though taxpayers are required to withdraw the required minimum distribution for each type of plan that the own, they do not have to take one for each individual account.

In order for a taxpayer to calculate the correct minimum distribution that they're required to take for each type of IRA, each year from the time they turn 70 ½ they should add up the total holdings of each IRA account as of December 31st of the previous year. That total for each is then divided by an age-specific factor. The IRS provides a IRA Required Minimum Distribution table that extends to over age 115.

Considerations Regarding Estate and Beneficiary Taxes – There are a number of aspects of having an IRA account that must be taken into account when planning distributions. With reference to your estate, inheritance taxes will be applied to any funds that are undistributed at the time of your death. The distributions inherited by the beneficiaries who inherit your IRA will also be subject to federal income tax, which is a good reason for prioritizing the distribution of IRA funds during your retirement years before depleting others. That being said, leaving funds in your IRA provides the benefit of tax-free accumulation.

Every individual situation is different, and there are no hard and fast rules as to the correct way to approach IRA distributions.

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Spencer Wilson

Spencer Wilson

Spencer Wilson, EA is a tax preparer based in Long Beach, CA. Spencer Wilson Financial Management Services has been serving the Greater Los Angeles Area and Orange County since 2004. <br /> We began in the heart of Naples in Long Beach and we continue to work hard offering tax preparation and planning, business accounting and bookkeeping and payroll services . <br /> We have helped many different people and businesses succeed financially and take control over their finances.

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