Although advance planning is needed to help accumulate the
biggest possible nest egg in your traditional IRAs, it is even more critical
that you get help in planning for distributions from these tax-deferred
retirement planning vehicles. There are three areas where knowing the ins and
outs of the IRA distribution rules can make a big difference in how much you
and your family will keep after taxes:
(1) Early distributions. If you need to take money out of a traditional IRA
before age 59-1/2 (e.g., for education expenses for children, to help make a
down payment on a new home, or to meet necessary living expenses if you retire
early), any distribution to you will be fully taxable (unless nondeductible
contributions were made, in which case part of each payout will be tax-free).
In addition, distributions before age 59-1/2 may be subject to a 10% penalty
tax. However, there are several ways that the penalty tax (but not the regular
income tax) can be avoided, including a method that is tailor-made for
individuals who retire early and need to draw cash from their traditional IRAs
to supplement other income.
(2) Naming beneficiaries. The
decision concerning who you wish to designate as beneficiary of your
traditional IRA is critically important. This decision affects the minimum
amounts you must withdraw from the IRA when you reach age 70-1/2, who will get
what remains in the account at your death, and how that IRA balance can be paid
out. What's more, a periodic review of whom you've named as IRA beneficiaries
is vital to assure that your overall estate planning objectives will be
achieved in light of changes in the performance of your IRAs, and in your
personal, financial and family situation.
(3) Required distributions.
Once you attain age 70-1/2, distributions from your traditional IRAs must
begin. If you don't withdraw the minimum amount each year, you may have to pay
a 50% penalty tax on what should have been paid out, but wasn't. In
planning for these required distributions, your income needs must be weighed
against the desirable goal of keeping the tax shelter of the IRA going for as
long as possible for both yourself and your beneficiaries.
If you think it seems easier to put money into a
traditional IRA than to take it out, you're absolutely right. This is
one area where expert guidance is essential.
If you would like assistance in reviewing your traditional IRAs
or analyzing other aspects of your retirement planning, please contact us.
