This article is original content written by Manchester, CT Financial Advisor Thomas Scanlon, CFP®, CPA
Required Minimum Distribution
The Internal Revenue Service (“IRS’) requires taxpayers to begin to take their Required Minimum Distribution (“RMD”) from their IRA’s and 401(k) plans by April 1st following the year they turn 73. Failure to take this RMD will result in a 50% penalty of the amount that should have been taken. Most folks however may not want to wait for the year following the year they turn 73. If you do this then you are required to take out two distributions that year. Taking two distributions in one year may put you in a higher tax bracket. At the latest, take the RMD in the year you turn 73.
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Early Bird
For some individuals they may want to take distributions long before they are required to. Distributions from an IRA after age 59 1/2 are not subject to the premature distribution penalty of 10%. Essentially you can take a distribution from your IRA after age 59 1/2 and must begin taking distributions by April 1 of the year following the year you turn 73.
If you are in your 60’s and in a fairly modest tax bracket, you might want to consider taking a distribution from your IRA. Yes, it will be taxable income. However, if you are in a modest tax bracket it might make sense depending on your individual facts and circumstances.
What’s the benefit of taking distributions from your IRA early?
* If you are in a modest tax bracket the income tax may not be very much.
* This distribution will be eligible for a Roth Conversion. A Roth Conversion is when a distribution is made from an IRA and taxed. Then the funds are deposited into a Roth IRA. The advantage with a Roth IRA is distributions may be tax-free if the account is open at least five years and you are over age 59 1/2. Additionally, Roth IRA’s are not subject to the RMD rules during the owners and surviving spouse’s lifetime.
* You will be getting income / cash flow from your investment portfolio.
* This will reduce the amount in the IRA. RMD’s are based on the fair market value of the IRA account from the prior December 31. By reducing the IRA account balance by taking distributions early, you will be reducing your future RMD’s.
If you are considering taking distributions from your IRA early this needs to be done in connection with your overall financial plan.
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Unless certain criteria are met, Roth IRA owners must be 59 1/2 or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion. Raymond James and its advisors do not offer tax or legal advice.