Sustain Wealth Advisors » IRA http://www.sustainwealth.com Retirement Protection Specialists Thu, 24 Oct 2013 20:03:44 +0000 en-US hourly 1 http://wordpress.org/?v=4.0.1 Smart IRA Tips For Taking Your Required Minimum Distributions http://www.sustainwealth.com/smart-ira-tips-for-taking-your-required-minimum-distributions/ http://www.sustainwealth.com/smart-ira-tips-for-taking-your-required-minimum-distributions/#comments Wed, 07 Mar 2012 05:00:00 +0000 http://www.sustainwealth.com/?p=1037 401k-roth-ira-investments

IRAs, 401(k)s, and other traditional retirement savings plans make up a significant part of many investors net worth these days.  During your working years, the tax deductions for contributions combined with tax deferred growth make these investments attractive for many […]

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IRAs, 401(k)s, and other traditional retirement savings plans make up a significant part of many investors net worth these days.  During your working years, the tax deductions for contributions combined with tax deferred growth make these investments attractive for many younger workers.

But like the old saying goes, “all good things must come to an end.”

The IRS will only allow you to defer taxes in your IRA for only so long. When you reach that magical age of 70 1/2 you are now forced to begin taking minimum required distributions every year going forward.

These distributions are taxed as ordinary income and must be distributed each year by December 31st. You better make sure that you’re taking the withdrawal properly because the penalty for not doing so is 50% of the amount you should have taken. Ouch!

Here’s some tips for making smart decisions when it comes to taking the Required Minimum Distribution from your IRA each year.

Avoid two distributions in the same year. Retirees who delay their first retirement account withdrawal until April 1 will need to take two distributions in the same year because the second distribution will be due December 31. Withdrawals from 401(k)s and IRAs are taxed as income, and two withdrawals in the same year could significantly increase your income tax bill. Take a look at what your taxable income is going to be and determine whether or not two distributions are going to kick you into a higher tax bracket.

Delay 401(k) withdrawals if you are still working. People who are still working after age 70½ can delay distributions from their current 401(k), but not IRA, until April 1 of the year after they retire. If you are an employee, then you can continue to leave that money in the plan.  However, employees who own 5 percent or more of the company sponsoring the plan must start 401(k) distributions after age 70½, even if they are still working.

Withdraw the correct amount. The distribution amount is generally calculated by dividing your account balance by an IRS estimate of your life expectancy. However, if you have a spouse who is more than 10 years younger than you and is the sole beneficiary of your IRA, your spouse’s age must also be factored into the calculation. Retirees over age 59½ can withdraw more than the required minimum amount each year, but excess withdrawals will not count toward required distributions in future years. Retirees can take any number of withdrawals they choose throughout the year, as long as the minimum is met by December 31 (or April 1 if it is your first required distribution).

Take distributions from the worst-performing account. If you have several IRAs, you must calculate the required minimum distribution for each account, but you don’t have to take a separate withdrawal from every IRA you own. You can add up your IRA distributions and take it all out of one IRA or a combination of any IRAs you choose. If you have three IRA accounts and they are paying you 1 percent, 3 percent, and 5 percent, my suggestion, in most cases, would be to take it all from the one that is paying you the least.

Those with a 401(k) or most other types of workplace retirement accounts must take a withdrawal from each account. However, if you have multiple 403(b) tax-sheltered annuity accounts, you can total the required minimum distributions and take them from any account or combination of accounts.

Convert to a Roth. There are no minimum distribution requirements for Roth IRAs. Workers already paid income taxes on Roth IRA contributions, and the money can be withdrawn as you need it or can be passed on to heirs. Once you have a Roth, then you don’t have to worry about distributions.  Having both Roth and traditional retirement accounts can add tax diversification and flexibility to your retirement draw-down strategy.

If you’re looking for strategic ways to enhance the IRA withdrawals you’re forced to take, we’d be happy to discuss your options further.  Just call us or leave a comment below.

 

More at Smart Strategies for Taking Required Minimum Distributions

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IRA Rollover- Don’t Make This Mistake http://www.sustainwealth.com/ira-rollover-dont-make-mistake/ http://www.sustainwealth.com/ira-rollover-dont-make-mistake/#comments Sat, 04 Feb 2012 13:49:01 +0000 http://www.sustainwealth.com/?p=492 ira-rollover_dog

When properly planned, an IRA rollover should be a tax-free (and a trouble-free) transaction. But you do have to follow the rules to keep the tax-deferred status of your
 IRA assets, or face the consequences of the IRS. The IRS […]

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When properly planned, an IRA rollover should be a tax-free (and a trouble-free) transaction. But you do have to follow the rules to keep the tax-deferred status of your
 IRA assets, or face the consequences of the IRS.

The IRS gives you 60 days to rollover funds from a traditional IRA or a similar qualified
 account to another traditional IRA or qualified account. If you haven’t completed the 
rollover within this 60-day window, your IRA rollover essentially becomes a taxable IRA 
withdrawal. That means the entire amount of the rollover will be subject to taxes at your 
current ordinary income tax rate. Plus, if you haven’t reached age 59½, you’ll also face a
 10% penalty on the withdrawal.

Ouch!

Another rule states that a rollover can only consist of the same property. You cannot take 
the lump-sum distribution from your IRA, purchase other assets with the cash, then roll
 those assets over into a new IRA. This violates the same property rule. The IRS would 
consider the cash distribution from your IRA as income, subject to taxes at your current
 ordinary income rate plus any applicable penalties.

Here’s an example of how an investor could run afoul of this rule:

A just-retired executive, age 58, has decided to rollover his 401(k) account from his 
former employer into an IRA. He wants to purchase some shares of the company’s stock 
with his rollover assets. So, he takes a portion of the funds he has received from his
 401(k) account to buy the shares, and places the remainder of the qualified money in a 
new IRA. Then, he deposits the shares of stock he purchased into the same IRA, in order 
to maintain the tax-deferred treatment of these assets.

The IRS would view the portion of the 401(k) rollover used to purchase the stock as 
taxable income, and the investor would owe taxes at his current ordinary income tax rate
 on this amount. Plus, the IRS would also assess a 10% penalty on this taxable amount 
because he is younger than 59½.

There’s a relatively easy way to avoid these income taxes and penalties – do a direct 
trustee-to-trustee transfer.

This will let the IRA and retirement plan custodians do all the
work of moving your assets. You don’t have to worry about receiving a lump-sum
 distribution check and making sure you deposit the funds in a new IRA within the 60-day 
window. The trustees can also ensure that your assets are transferred in a time efficient 
manner.

Please keep in mind the services provided by a Trustee may involve costs which
 can reduce the overall return on your investment.

If you have multiple IRA’s or other qualified retirement accounts and would like to
 consolidate these assets into one account, we can help you manage the process and make
 sure it is done as efficiently as possible. Please call our office at 800-960-3499 or send us a message with your questions.

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IRA Tax Rules- Which Investments Are Best For Your IRA? http://www.sustainwealth.com/ira-tax-rules-which-investments-are-best/ http://www.sustainwealth.com/ira-tax-rules-which-investments-are-best/#comments Tue, 14 Jun 2011 16:17:11 +0000 http://www.sustainwealth.com/?p=774 ira-tax-rules

As of the time of this post, current tax law has reduced the long-term capital gains tax and the tax on qualifying dividends to 15%. However, interest income, non-qualified dividends, and short-term capital gains will still be considered ordinary income and therefore taxed […]

The Original Post Is Located Here: IRA Tax Rules- Which Investments Are Best For Your IRA?

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As of the time of this post, current tax law has reduced the long-term capital gains tax and the tax on qualifying dividends to 15%. However, interest income, non-qualified dividends, and short-term capital gains will still be considered ordinary income and therefore taxed as high as 35%.

In light of these changes, you may want to reevaluate which of your investments should be inside your IRA and which ones should be held in taxable accounts.

IRA tax rules consider all distributions from your IRA as ordinary income and therefore taxed as high as 35%. On the other hand, withdrawals from a taxable account might be treated at the more favorable 15% rate if they are qualifying dividends or long-term capital gains.

Based on these IRA tax rules, you could conclude that you would be better off putting bond funds in your IRA and stock funds into a taxable account. But the answer may not always be that simple.

Suppose that you own a stock fund in a taxable account, and the manager trades frequently and creates short-term gains? The gains will be passed on to you and taxed at the ordinary income rate.

Therefore, in this case, a stock fund held in a taxable account, was not tax efficient.

Would you be better off holding it in an IRA?

It’s possible; especially when you consider that the tax deferral within an IRA can enhance the compounding of the earnings. But there is another point to consider.

If the fund is held in a taxable account it will receive the step-up in basis when you die. This will eliminate any capital gains tax that your heirs would pay on your investment’s accumulated profit.

In addition, you can deduct losses within a taxable account yet cannot for an IRA.

Saving money on taxes is certainly important, but you need to take your full financial picture into consideration before making any decisions.

If you are not sure whether your investments are making the best of the current tax laws, feel free to contact us to schedule a complimentary telephone review of your current tax situation.

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My Spouse Passed – Now I’m In A Higher Income Tax Bracket! http://www.sustainwealth.com/my-spouse-passed-im-in-higher-income-tax-bracket/ http://www.sustainwealth.com/my-spouse-passed-im-in-higher-income-tax-bracket/#comments Sat, 05 Mar 2011 21:59:21 +0000 http://www.sustainwealth.com/?p=827 income_tax_bracket

This is a cautionary tale of one retiree who suffered a loss of income in her later years.  Although the story is fictional, its lessons are significant and could save you and your spouse money at a time when you […]

The Original Post Is Located Here: My Spouse Passed – Now I’m In A Higher Income Tax Bracket!

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This is a cautionary tale of one retiree who suffered a loss of income in her later years.  Although the story is fictional, its lessons are significant and could save you and your spouse money at a time when you may need it most.

A few years ago, John and Mary Rodgers were enjoying a comfortable retirement together. Their annual income of $80,000 from Social Security, pensions and withdrawals from John’s IRA was enough to cover their living expenses and allow them to pursue leisure activities such as travel, golf outings, and fine dining.

That changed when John unexpectedly passed away. Mary continued to receive the same pension income. She also inherited John’s IRA and continued to withdraw the same amount of money each year to maintain her standard of living and leisure activities.

However, as the years went by, she found that she actually had less money to spend, and had to scale back on some of her vacations, golf outings, nights out with friends, and other daily expenses.

She wonders, “What happened to the comfortable retirement I was living before John passed away? Why don’t I have as much money now as I did when my husband was still alive?”

Unfortunately, Mary is now in a higher income tax bracket, and more of her annual income is going to the government and not to her retirement.

Married Filing Jointly Single
Taxable Income $80,000 $80,000
Tax Bracket (2010) 25% 28%
Taxes Due $13,330 $16,906

Source: IRS 2011 Tax Rate Schedules; http://www.irs.gov/formspubs/article/0,,id=133517,00.html

Among the many unfortunate circumstances that may occur upon the death of a husband or a wife is that the surviving spouse could be pushed into a higher income tax bracket, even though his or her income level hasn’t changed. While a surviving spouse like Mary may have some options to lower her income tax burden, one of the best times to find a solution to this problem is while both spouses are still alive.

If your situation is similar to John & Mary’s, one possible solution that might help is to convert an existing traditional IRA to a Roth account. Although there is an income tax up front at the time of conversion, qualified distributions from the Roth IRA are free of federal income taxes, even if they are made by the surviving spouse. A qualified distribution is one in which the age and holding-period requirement have been satisfied (which are discussed below).

Also, partial roll-overs can be used in some cases to help reduce the income taxes incurred on the conversion. For example, consider a situation where a taxpayer is holding $100,000 in a traditional IRA and wants to convert this money over to a Roth account.

Assuming the taxpayer converts $20,000 each year for five years, the income tax will actually be spread out over a longer period. This strategy can also prevent the converted funds from being taxed at the higher 28-35% federal tax rates.

Unlike a traditional IRA, a Roth IRA has no minimum distribution requirements. Many retirees find this advantage useful in managing their income flow and, likewise, their tax burden. With a traditional IRA, you are required to take minimum withdrawals from the account by age 70-1/2, even if you have other sufficient sources of income and do not need to withdraw the money. These requirements may push you or your surviving spouse into a higher tax bracket, with fewer options for reducing your tax burden.

Before you do a consider a conversion, however, you should know that there is a five year holding period rule that applies to amounts rolled over to the Roth account. Also, early withdrawals from a Roth IRA prior to age 59 ½ can be subject to federal income taxes as well as a 10% federal tax penalty. Therefore, a Roth may not be the best choice if you are already into your retirement and need to use your money now or in the near future. Although distributions are typically free of federal income taxes, state income taxes might apply in some states.

We always advise people to consult with their own qualified legal, tax, and financial advisor prior to making any financial decisions.

Before you convert a traditional IRA to a Roth, it is wise to review the benefits of each type of account and determine if a conversion would be appropriate for your current financial situation.

Call our office for resources on Roth IRA conversions, or us our contact us form to send us your questions.

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