IRA Distribution Rules are Complex
On the surface, taking money out of your IRA seems straightforward. This isn’t the case. As a matter of fact, the IRS publication covering IRA distributions is 69 pages long. And IRA distribution rules are somewhat of a moving target – the rules seem to be constantly changing.
Required Minimum Distributions
It used to be simple to determine when you had to take money out of your IRAs. The age for everyone was 70 ½. The age is now between 73 and 75, depending on the year you were born. The penalty for missing a RMD has dropped from 50% of the required distribution to 25%. While this is good news, 25% is still a heavy penalty.
Will Your IRA RMD be More Than Needed?
To realize the tax savings of making IRA contributions and saving in company retirement plans, many people reach their RMD age finding the distributions, along with Social Security and other earnings, will more than they need for a comfortable retirement. Not only are the excess RMD amounts taxed, but they can also cause more Social Security to be taxed and may even cause qualified dividends and capital gains to be taxed that previously were not.
What can you do? The first thing to consider is beginning distributions before the RMD date. People can often spend down some of the IRA balances early in retirement and, potentially delay taking their Social Security benefits, to arrive a more manageable RMDs. If this doesn’t solve the problem, converting part of the IRAs to Roth IRAs should be considered.
Retirement Income Planning is Complex
IRA distributions should not be considered in a vacuum. You need to look at them in context with all other sources of income to arrive at the best decision on when to take the money out. A Tax Acuity Approved Advisor™ is trained in retirement income planning. Please reach out to one of our advisors on our contact page if you would like some help navigating these issues.