Do you have questions about withdrawing from your IRA? We like to describe the IRA as a bell curve, hopefully growing up
over the years, and then slowly draining over the rest of your life expectancy, starting at age 70 ½.
There are three types of withdrawals, also known as distributions:
- Owner withdrawal before age 59 ½, after age 59 ½, and after age 70 ½;
- Owner passes away and the spouse inherits account;
- Owner passes away and a non-spouse inherits the account.
Distributions before age 59 1/2. In addition to all applicable federal and state taxes, if you take distributions before age 50 1/2, you’ll also have to pay a 10-percent penalty. However, under certain extenuating circumstances, you may avoid the penalty—though you’ll still owe the taxes. Exempt situations may include:
- Buying your first home;
- Paying for a child, grandchild, or spouse’s school;
- Unreimbursed medical costs that are more than 7.5 percent of your adjusted gross income;
- Health insurance premium costs, if you’re unemployed for 12 weeks or more;
- In the case of disability or death.
Distributions after age 59 1/2. There are no penalties or restrictions if you take disbursements between the ages of 59 1/2 and 70 1/2. Remember, your interest, dividends, and capital gains will be taxed as ordinary income, so you may owe state and federal taxes.
Distributions after age 70 1/2. Once you turn 70 1/2, you must take distributions. Also known as minimum required distributions or MRDs, if you don’t make these withdrawals, you’ll pay a penalty of up to 50 percent of the amount you should have taken.
If you pass away and your spouse inherits your account. Good news: if your spouse doesn’t need the funds right away, they can roll them over into their own IRA then take distributions after 59 1/2. If they need the funds early and are under age 59 1/2, they can roll the funds into a so-called “Inherited IRA” account and avoid the 10-percent penalty.
If you pass away and a non-spouse inherits your account. If your IRA passes to a non-spouse beneficiary, they may transfer the assets into an inherited IRA beneficiary account. Distributions will depend on your beneficiary’s age and life expectancy, and will be taxed as part of their income.
The rules that govern IRA distribution and inheritance are complex. Meet with a trusted financial advisor to work through the details.
Considering tapping into your IRA? Know the rules first to avoid fees and penalties.
Listen below to Win Damon and Stu review this topic on WNBP Fm 106.1 Newburyport and streaming live at WNBP.com
Sources:
https://www.fidelity.com/viewpoints/retirement/non-spouse-IRA, https://www.fidelity.com/viewpoints/retirement/surviving-spouse-IRA, http://www.schwab.com/public/schwab/investing/retirement_and_planning/understanding_iras/traditi onal_ira/withdrawal_rules, http://www.forbes.com/sites/investor/2011/08/16/15-ways-to-withdraw- from-your-ira-without-penalty/, http://www.schwab.com/public/schwab/investing/retirement_and_planning/understanding_iras/traditi onal_ira/withdrawal_rules, http://www.bankrate.com/finance/money-guides/when-it-s-ok-to-tap-your- ira-1.aspx, www.irs.gov/pub/irs-pdf/i5329.pdf
Stuart Steinberg, CPA, MBA has been dealing with families and their money issues since 1988. He can be reached at 55 Pleasant Street Newburyport and at (978)864-9581 and stu@eaglerockwealth.net
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.
This information is not intended to be a substitute for specific individualized tax advice. We suggest you discuss your specific tax issues with a qualified tax advisor.
Securities Offered through LPL Financial, Member FINRA (www.FINRA.org) /SIPC
(http://www.sipc.org/)
