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Do You Have a Tax Strategy for Your IRA Distributions?

3/8/2018

 
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​The IRA is one of the most popular available retirement savings vehicles. Americans hold nearly $2.5 trillion in individual retirement accounts (IRAs). Those nearing retirement, between the ages of 60 and 64, have an average of $165,139 in their IRA.1 If you own an IRA, you may rely on it in retirement to generate a substantial portion of your income.
 
IRAs are popular because of their unique tax treatment. Some IRAs, such as traditional IRAs or SEP IRAs, allow you to take a deduction for contributions, assuming you meet income guidelines. All IRAs offer tax deferral, which means you don’t pay taxes on growth as long as your funds stay inside the account.
While IRAs may offer a tax-favored method for accumulating retirement assets, they can also generate tax exposure in retirement. It’s important to understand how your IRA distributions could be taxed so you can plan accordingly. Below are a few important guidelines to keep in mind:

Traditional IRA
The traditional IRA is a popular savings vehicle that offers tax benefits today but may generate tax exposure in the future. Assuming you meet income guidelines, you can make tax-deductible contributions to your traditional IRA. Your funds can then grow on a tax-deferred basis as long as they stay in the account.
 
However, distributions from a traditional IRA are treated as taxable income. If you have used a traditional IRA, or similar variations such as a SEP IRA or rollover IRA, to accumulate retirement assets, you may face taxes on a substantial portion of your retirement income.
 
Some people minimize their tax exposure by waiting to take distributions from their traditional IRA. However, you can’t delay the distributions forever. The IRS mandates withdrawals from traditional IRAs starting at age 70½. These required minimum distributions (RMDs) continue for the rest of your life, and the amount could increase as you get older.


Roth IRA
The Roth IRA has gained popularity in recent years because it can be used to create tax-free retirement income. It shares similarities with the traditional IRA but also important differences. Like a traditional IRA, the Roth offers tax-deferred growth as long as your funds are inside the account.
 
Unlike a traditional IRA, however, your Roth IRA contributions are not tax-deductible. Also, all your Roth withdrawals are tax-free, assuming you are over age 59½ and the account has been open at least five years.
 
Also, Roth IRAs don’t have RMDs. That means you can keep your funds in the account as long as you want. In fact, you never have to take a distribution if you don’t want to, and the balance is passed tax-free to your beneficiaries.


Early Distribution Penalty
IRAs were designed to be retirement savings vehicles. The whole point of tax deferral is to encourage you to save money for the future. That means you’re not supposed to take money out of the accounts unless you are retired. The IRS enforces this rule by imposing a penalty for distributions prior to retirement.
 
For penalty purposes, the IRS considers 59½ to be retirement age. If you are 59½ or older, you can take IRA distributions without facing a 10 percent early withdrawal penalty. If you take a withdrawal when you are under age 59½, however, you could face a penalty. There are some exceptions for things like medical issues and disability, but not all exception requests are granted.
 
Ready to plan your IRA distribution strategy? Let’s talk about it. Contact us today at Stoll and Basler Financial Services. We can help you analyze your needs and develop a strategy. Let’s connect soon and start the conversation.

 
1https://www.fool.com/retirement/2016/06/27/heres-how-much-the-average-american-has-in-an-ira.aspx



Licensed Insurance Professional. This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting or specific advice for your situation. By providing your information, you give consent to be contacted about the possible sale of an insurance or annuity product. This information has been provided by a Licensed Insurance Professional and does not necessarily represent the views of the presenting insurance professional. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice. This information has been provided by a Licensed Insurance Professional and is not sponsored or endorsed by the Social Security Administration or any government agency.
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