PLANNING TODAY

Managing Your IRA in Retirement

Your Individual Retirement Account (IRA) may be your most significant source of income during retirement. Many Americans have the bulk of their retirement savings in IRAs and similar tax-deferred retirement plans. The rules governing these plans are complex, and you need to understand the basics so that you can manage your IRA properly. In this issue we are discussing Traditional IRAs and not Roth IRAs. Here are some important points to keep in mind:

  1. Distributions All distributions from your IRA are taxable. This is because the funds in your IRA have never been taxed. You received a tax deduction when you deposited them, and no taxes were paid as the funds grew inside of your IRA account. You pay must the income tax when you withdraw the money.
  2. Early Distributions You may begin withdrawing your money from your IRA anytime after age 59½. If you make a withdrawal before age 59½, you will owe a 10% early withdrawal penalty, in addition to the tax. There is a way to avoid this penalty if you plan on taking your money out regularly over several years. Make sure you talk with your financial planner before making an early withdrawal.
  3. Required Beginning Date You must begin making withdrawals from your IRA by a certain age. The rule is somewhat confusing: You must make your first withdrawal by April 1st of the year after the year in which you turn age 70½. For practical purposes, it is often desirable to go ahead and take your first withdrawal at the end of the year in which you turn 70½. Otherwise, you may end up having to take two withdrawals in one year. Please consult with your financial planner on this issue.
  4. Minimum Distributions You must withdraw at least a minimum amount every year, once you start your required distributions after age 70½. The IRS has published a table that tells you exactly what percentage you must withdraw each year. This percentage increases as you get older. For example, at age 70 you must withdraw at least 6.5% of the account balance. By the time you reach age 85, the minimum distribution will be 14.5%. If your spouse more than ten years younger than you, you can withdraw smaller amounts. Please check with your financial planner for advice in this area.
  5. Penalties There is severe penalty for failing to take the required minimum distributions. The IRS will charge you a penalty equal to 50% of the amount that you should have withdrawn. This is a punitive penalty that you should avoid at all costs. The financial institution that serves as custodian of your IRA may remind you how much to withdraw each year. We suggest you check with them and make sure they are providing this service.
  6. Beneficiaries It is important to carefully plan the way you name your beneficiaries on your IRA. In most cases, married people should leave their IRAs to their spouses, but they should still think about their ultimate beneficiaries. You may leave your IRA to family members, other people or charitable organizations. When you name a charity as one of your IRA beneficiaries, the charity will receive the full amount tax-free because charities do not pay income tax. This is an excellent way to arrange an estate gift for your favorite charitable organizations. Please ask your attorney or financial planner to assist you with your beneficiary selections.

You can obtain more information about IRAs in IRS Publication 590, which you can order by calling 1-800-829-3676. Make sure you get some help from your accountant or your financial planner about required minimum distributions and naming beneficiaries.

Judy Ludin, Development Executive
Menorah Manor Foundation
255 59th Street North
St. Petersburg, FL 33710
Telephone: 727-302-3704

Email: foundation@menorahmanor.org

 

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