Say you saw it in the Beacon | Law & Money
H O WA R D C O U N T Y B E A C O N — M A R C H 2 0 1 6
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How to minimize taxes on IRA withdrawals By Elliot Raphaelson Many readers are concerned about tax issues, specifically the impact of the required minimum distribution (RMD) and what tools are available to mitigate it. Under current regulations, at 70 1/2, when you will be required to make minimum withdrawals from your traditional IRA, you should project what your taxable income is likely to be at that milestone. Consider additional taxable income from non-retirement assets, pensions and/or Social Security. Take these projections into account to estimate the minimum distribution you will have to make starting at 70 1/2. You may project that your tax bracket will be higher then than it is now. Moreover, as you get older, and the percentage you have to withdraw increases (because your life expectancy decreases), your marginal tax rate may become higher as you age. Is there a way you can avoid paying more tax than you have to?
individuals will be facing a higher marginal tax rate even without counting the required IRA withdrawal. Another option is converting some of your IRA funds into a Roth IRA. One advantage is that those funds will no longer be included in your traditional IRA when you reach 70 1/2. Accordingly, the amount you have to withdraw because of RMD will be less. Another advantage is that income from (and appreciation of) the securities in the Roth account will not be taxable. Moreover, your beneficiaries will have no income tax liability. The major disadvantage is that the funds you convert to a Roth will be taxable at ordinary income tax rates in the year you convert. Consider making conversions gradually to prevent increases in your marginal tax rate. If you do convert to a Roth, you may withdraw your initial principal without penalty. However, there is a penalty for withdrawing interest or dividends if you withdraw them before a five-year holding period.
Start taking withdrawals now One strategy is initiating a withdrawal plan from your IRAs before you reach 70 1/2, even if you don’t need the funds now. This could make sense if you know your marginal tax rate will be higher. For example, many readers have indicated that they intend to wait until 70 before they start receiving Social Security payments. For many recipients, much of this extra income will be taxable, so many
Consider a special annuity
RMDs
account. You have to pay tax on the distribution, yes, but you can immediately reinvest it in a taxable investment account. All contents © 2016 the Kiplinger Washington Editors, Inc. Distributed by Tribune Content Agency, LLC.
From page 26 money in the tax shelter until you need it). And there is no requirement that you spend the money once it comes out of the
Another option is the use of a qualified longevity annuity contract (QLAC). QLACs can be used in traditional IRAs for lifetime income starting at a future date. If you have a traditional IRA, you can defer 25 percent of the total of all your IRAs or $125,000, whichever is less. The only requirement is that payments have to start at a specified date no later
than at age 85. This alternative makes sense if you are concerned about ensuring future income and you want to minimize your taxes starting when you reach 70 1/2. An excellent source for QLACs is Stan Haithcock (website: www.stantheannuityman.com). Vanguard has put together an excellent webcast with a transcript on its website, vanguard.com. It’s called “Managing your IRA assets before and throughout retire-
ment.” In this webcast, specialists from Vanguard answer questions from callers on a wide variety of topics, including the impact of RMDs, use of Roth IRAs, effective tax policy, use of charitable deductions, and a wide variety of other topics that will help you manage your IRAs. Elliot Raphaelson welcomes your questions and comments at elliotraph@gmail.com. © 2016 Elliot Raphaelson. Distributed by Tribune Content Agency, LLC.
BEACON BITS
Mar. 1
COLUMBIA Qs AND As
The Columbia Association’s citizens academy, Excite Columbia, will hold the first of six weekly programs of speakers presenting information and answering questions on topics of concern to Columbia residents. To register for the March 1 program, visit ColumbiaAssociation.org/Excite. For more information, call (410)423-1891.
Mar. 16+
NEW PEDESTRIAN PLAN
Howard County is updating its 2007 Pedestrian Plan, a system of sidewalks, pathways, bus stops and roadway crossings to make walking easy and safe. Two open houses have been scheduled to solicit residents’ opinions and suggestions. On Monday, March 16, representatives will hold an open house from 7 to 8:30 p.m. at Slayton House in Wilde Lake Village Center, 10400 Cross Fox Ln., Columbia. Another open house will be held Saturday, March 28, from 1:30 to 3 p.m. at North Laurel Community Center, 9411 Whiskey Bottom Rd., Laurel. For more information, call (410) 313-3130, email info@walkhoward.org, or visit www.WalkHoward.org.