IRA withdrawls and mistakes
Rollover IRAYou have 60 days to rollover the money. If you pass this deadline, you have to pay income tax on the entire amount that year, rather than continue to let your assets grow tax free until you start making withdrawls. There is a fix, if you missed the deadline by mistake - you can request a 'private-letter ruling' from the IRS (by filling an application and paying a $95 fee, plus other fees if you hire an adviser to get off the hook.
If you are already over 70.5 years old and taking required distributions from your IRA every year, be sure to make your annual withdrawl before doing a rollover. Otherwise both custodians could wind up reporting your distributions to the IRS even though you only took one withdrawl. Also if you are in pay status, you are not allowed to rollover that year's minimum distribution.
Roth conversion
If you plan to pass along your IRA to your children and you want them to have it as a Roth, you have to do it, they cannot do the conversion.
Taking too little or too much
You have to take what the IRS calls a series of substantially equal periodic payments, on a schedule. And you must continue taking them for at least five years or until you turn 59.5 whichever period is longer. So if you start taking withdrawls at age 50, you are on the hook for 9.5 years; if you start at age 57, you would have to take the withdrawls until you turned 62. And you should work with someone who is familiar with 72(t) payments to set up your plan.
Missing the low tax window
If your tax bracket drops after you stop earning a regular paycheck, and you expect your tax rate to increase again when you start taking mandatory IRA withdrawls, it may be good time to take some money out of your IRA. That way you pay lower taxes on your IRA money than you would by postponing those withdrawls.
To figure out how much to take out, you would subtract your income for the year from the ceiling of your current tax bracket, and then withdraw as much as you could from your IRA without bumping yourself into a higher bracket.
For example, a retired married couple with $50,000 income would be in the 15.5% bracket, which has a ceiling of $59,400 in income. They could withdraw $9400 from their IRA before bumping their tax rate for additional income to 25%.
What to do with the withdrawls - You can use that money for life insurance or a real estate investment where you could leverage it even further. Or you could roll it into a Roth IRA, an account in which you can invest after tax money in exchange for tax free growth.
Inheriting IRA
If you inherit IRA from anyone other than your spouse, you cannot under any circumstance, roll into your own IRA. You also can't withdraw the assets from an inherited acct and then deposit them into a new IRA. And you can't consolidate IRAs you inherit from different people into one acct. But traditional IRAs and Roth that you inherit have one important thing in common with the ones that you hold yourself. You can stretch out the withdrawls across your lifetime, rather than taking them as a lumpsum. That gives you a chance to postpone the tax bite and lengthen the time that tax free earnings can accrue, possibly increasing your inheritance by thousands of dollars.
You don't have to cash out the inherited IRA within 5 years of the owner's death - many people assume to do so because the govt made that as a default. You can stretch those withdrawls across your life expectancy.
With your own IRA you have to start taking minimum withdrawls by April 1 of the year after you turn 70.5 and you determine the minimum amount each year by looking up your life expectancy in the appropriate table and then dividing your year end acct balance by that number.
But with an inherited IRA, you first need to retitle the IRA so it is clear that the owner died and you are the beneficiary. After doing that you would look up your life expectancy one time. Each year you simply subtract a year from your initial life expectancy to figure out how much to withdraw.
Beneficiaries
When it comes to your IRA, your will is irrelevant. The way an IRA gets passed along to your heirs is governed by the beneficiary form you are supposed to fill out when you open the acct. It is a good idea to review those forms regularly and keep your own copy for easy access (don't expect your bank/brokerage should hold this, sometimes they don't). In the forms, you may see a box to check for a 'per stripes' designation - which means that assets would go to your beneficiary's children if he or she dies before inheriting your IRA.
Books
IRAs, 401Ks, & Other Retirement Plans - Twila Slesnick and John C.Suttle
Parlay your IRA into a Family Fortune - Ed Slott
The Retirement Savings Time Bomb And how to defuse it - Ed Slott
www.irahelp.com
www.ataxplan.com
www.irs.gov
personal.fidelity.com/retirement
Labels: IRA, IRA mistakes, IRA withdrawls
posted by Valli @ 9:13 AM
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