An IRA can be a beautiful thing. You can contribute money to a retirement account and it grows tax deferred until you withdraw it. Many folks leave their IRAs in place, still growing through retirement until they have to start withdrawing funds from these accounts. If you have an IRA and you are approaching your 70’s, you probably are aware that you will need to begin to make withdrawals from this account whether you need the money or not. These are called Required Minimum Distributions, or RMDs.
When IRAs were created, the IRS set rules allowing you to defer withdrawals from these accounts until April of the year after you turn 70 ½. These rules can be confusing. If you were born in the second half of 1946, you turn 70 ½ in 2017 and so would need to take withdrawals starting April 1, 2018. If you were born in the first half of 1946, you would turn 70 ½ in 2016 and would need to take withdrawals starting in April 1, 2017.
If you are dreading paying tax on these RMDs, you are not alone. Many folks I meet dislike taking their RMDs. They don’t need the money and don’t like paying taxes. Often, they only withdraw the minimum and put the money into a savings or checking account. Then they don’t know what to do with it.
The reality of the situation is often this: your IRA is a ticking tax bomb. And believe me, Uncle Sam will collect his share. If you pass away owning an IRA, you can pass it to your spouse or to your children. But no matter what, taxes will ultimately be levied on this money. What’s worse, the vast majority of children who inherit an IRA take payment in a lump sum form, meaning the IRA is taxed at an incredibly high tax rate, likely at considerably higher rate than it would have been taxed if you took it out in retirement.
So how can you avoid this tax bomb? It may sound counterintuitive, but it’s actually quite brilliant: pay the taxes. If you are retired, you are likely making less money now than you did while you were working. And you are likely making less than your working children. This opportunity allows you to withdraw more than just your RMDs,reducing the ultimate tax liability on your IRA account in the long term. Now liquidating your entire account makes no more sense than having your child take it all out at once. But you need a methodical approach over several years as part of a larger plan to protect your assets from taxes, probate and long term care costs. For more information on tax savings strategies, please schedule an appointment for a free evaluation with an AlerStallings attorney today.