For those coming into retirement and have diligently saved for their golden years, now is the time to spend the money; literally.
This is because the tax deferrals that retirees enjoyed by putting money away into tax particular accounts (such as IRAs and 401(k)s) will come end for those turning 70. Essentially, the federal government will require those reaching this golden age to start taking money out of these accounts or face a stiff penalty.
Otherwise known as required minimum distributions (RMD), the amount that must be withdrawn is based on an IRS formula tied to one’s life expectancy. For example, a person who turns 70 ½ and has an IRA worth $600,000, the IRS sets its distribution table at 27.5 years. This means that a person with such an IRA would have to take out about $22,000 per year to avoid the tax penalty that would be imposed. If you don’t end up taking out money, the IRS would want 50 percent of the amount you didn’t take out.
Indeed, making these withdrawals may put a person into a higher tax bracket, but this may be better than the penalty imposed for not using the money. However, a skilled tax attorney can help make certain that the money is distributed in a way that can reduce the tax effects on you. For instance, an RMD from an IRA can be transferred to a Roth IRA to reduce the taxes from 15 percent from the 25 percent that would apply with a traditional withdrawal.
If you have questions about the taxes attributable to withdrawals, an experienced tax attorney can help.