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Distributions from Traditional IRAs


Distributions from Traditional IRAs

~ Author - Michael Koontz, Deluzio & Company - Staff Accountant II ~


Although advance planning is needed to help accumulate the biggest possible nest egg in your traditional IRAs (including SEP-IRAs and SIMPLE-IRAs), it is even more critical that you get assistance in planning for distributions from these tax-deferred retirement planning vehicles. With a new year approaching, and a market that continues to grow, it is important to understand some basic rules to get the most benefit out of your traditional IRA. 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.

Early distribution - With many retirement plan values up due to the market gains over the past few years, many individuals are considering extracting money from their nest egg to pay larger life expenses prior to retirement. 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.

Naming beneficiaries - The decision concerning who you wish to designate as beneficiary of your traditional IRA is critically important. 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.

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 be subject to a 50% penalty tax on the amount that 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, and where we can be of particular help to you and your family. It is always advisable to contact your CPA or financial advisor before making any plans to withdraw funds from your traditional IRA. If you have any additional concerns or questions related to these, or other retirement vehicle, please contact a member of our staff for further explanations.