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That First Distribution from Your IRA

Brent E Chavez

That First Distribution from Your IRA

What you need to know.

When you are in your seventies, Internal Revenue Service rules say that you must start making withdrawals from your traditional IRA(s). In I.R.S. terminology, these withdrawals are called Required Minimum Distributions (RMDs).1

Generally, these distributions from traditional IRAs must begin once you reach age 72. The money distributed to you is taxed as ordinary income. (When such distributions are taken before age 59½, they may be subject to a 10% federal income tax penalty.)1

If you fail to make these withdrawals or take out less than the required amount, the I.R.S. will notice. In addition to owing income taxes on the undistributed amount, you will owe 50% more. (This 50% penalty can be waived if you can show the I.R.S. that the shortfall resulted from a “reasonable error” instead of negligence.)1

Many owners of traditional IRAs have questions about these IRA distributions and the rules related to them, so let’s answer a few.

When is the deadline for your initial IRA distribution? It must be taken by April 1 of the year after the year in which you turn 72. So, if you turn 72 in 2020, your first distribution from your traditional IRA has to occur by April 1, 2021. All the distributions you take in subsequent years must be taken by December 31 of each year.1

The starting age for these distributions has changed from 70½ to 72 due to a new federal law, the Setting Up Every Community for Retirement Enhancement (SECURE) Act. IRA owners born on or after July 1, 1949 are now scheduled to take initial IRA distributions after they turn 72.2

Is waiting until April 1, 2021 a bad idea? Maybe. While the I.R.S. allows you three extra months to take that initial IRA distribution, putting off the withdrawal could bring on a tax issue. These distributions are taxable in the year that they are taken. If you postpone the initial distribution slated for 2020 into 2021, then the taxable portions of both your first mandatory IRA distribution (deadline: April 1, 2021) and your second mandatory IRA distribution (deadline: December 31, 2021) must be reported as income on your 1040 form for 2021.1

A hypothetical example: James and his wife Stephanie file jointly, and together they earn $168,400 in 2020 (the upper limit of the 22% federal tax bracket). James turns 72 in 2020, but he decides to put off his first IRA distribution until April 1, 2021, so that means he must take two IRA distributions before 2021 ends. His 2021 taxable income jumps as a result, and it pushes the pair into a higher tax bracket. The lesson: if you will be 72 by the time 2020 ends, take your initial distribution by the end of 2020 – or risk potentially higher taxes.1,3

How do I calculate my first IRA withdrawal? If your IRA is held at one of the big investment firms, it may calculate the withdrawal amount for you and offer to route the amount into another account of your choice. It will give you and the I.R.S. a 1099-R form recording the distribution, and the amount of it that is taxable.5

Otherwise, I.R.S. Publication 590 is your resource. You calculate the amount of the distribution using Publication 590’s life expectancy tables, and your IRA balance on December 31 of the previous year. If you Google “how to calculate your required IRA distribution,” you will see links to worksheets at irs.gov and a host of other free online calculators.1,4

If your spouse is more than 10 years younger than you and is designated as the sole beneficiary for a traditional IRA that you own, you should use the I.R.S. IRA Minimum Distribution Worksheet (downloadable as a PDF) to help calculate your distribution.6

Can I take my IRA distribution in increments? Yes, if time permits. Your IRA custodian may be able to schedule these incremental withdrawals for you, perhaps with taxes withheld.7

What if I have more than one traditional IRA? You can figure out the total mandatory distribution by separately calculating the distribution for each of your traditional IRAs. You can take the total distribution amount from a single traditional IRA or multiple traditional IRAs.1

What if I have a Roth IRA? You don’t need to make mandatory IRA withdrawals from a Roth IRA if you are its original owner. Only inherited Roth IRAs require these withdrawals.1

Be proactive. Delaying your first IRA distribution until 2021 could mean higher income taxes in 2022.

Citations
1 – irs.gov/retirement-plans/retirement-plans-faqs-regarding-required-minimum-distributions [2/7/20]
2 – forbes.com/sites/kristinmckenna/2020/01/10/you-can-now-take-required-minimum-distributions-at-72-but-should-you [1/10/20]
3 – nerdwallet.com/blog/taxes/federal-income-tax-brackets/ [2/5/20]
4 – google.com/search?client=firefox-b-1-d&q=how+to+calculate+your+required+IRA+distribution [2/10/20]
5 – finance.zacks.com/everyone-ira-1099r-4710.html [3/6/19]
6 – irs.gov/pub/irs-tege/jlls_rmd_worksheet.pdf [2/10/20]
7 – fidelity.com/viewpoints/retirement/smart-ira-withdrawal-strategies [1/27/20]

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

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The Major Retirement Planning Mistakes

Brent E Chavez

The Major Retirement Planning Mistakes

Why are they made again and again?

retirement mistakes, warning sign

Much is out there about the classic financial mistakes that plague start-ups, family businesses, corporations, and charities. Aside from these blunders, some classic financial missteps plague retirees.   

Calling them “mistakes” may be a bit harsh, as not all of them represent errors in judgment. Yet whether they result from ignorance or fate, we need to be aware of them as we plan for and enter retirement.        

1. Leaving work too early. As Social Security benefits rise about 8% for every year you delay receiving them, waiting a few years to apply for benefits can position you for higher retirement income. Filing for your monthly benefits before you reach Social Security’s Full Retirement Age (FRA) can mean comparatively smaller monthly payments. Meanwhile, if you can delay claiming Social Security, that positions you for more significant monthly benefits.1     

2. Underestimating medical bills. In its latest estimate of retiree health care costs, the Center for Retirement Research at Boston College says that the average retiree will need at least $4,300 per year to pay for future health care costs. Medicare will not pay for everything. That $4,300 represents out-of-pocket costs, which includes dental, vision, and long-term care.2     

3. Taking the potential for longevity too lightly. Actuaries at the Social Security Administration project that around a third of today’s 65-year-olds will live to age 90, with about one in seven living 95 years or longer. The prospect of a 20- or 30-year retirement is not unreasonable, yet there is still a lingering cultural assumption that our retirements might duplicate the relatively brief ones of our parents.3

4. Withdrawing too much each year. You may have heard of the “4% rule,” a guideline stating that you should take out only about 4% of your retirement savings annually. Many cautious retirees try to abide by it.

So, why do others withdraw 7% or 8% a year? In the first phase of retirement, people tend to live it up; more free time naturally promotes new ventures and adventures and an inclination to live a bit more lavishly.         

tax efficiency, budgeting, planning

5. Ignoring tax efficiency & fees. It can be a good idea to have both taxable and tax-advantaged accounts in retirement. Assuming your retirement will be long, you may want to assign this or that investment to its “preferred domain.” What does that mean? It means the taxable or tax-advantaged account that may be most appropriate for it as you pursue a better after-tax return for the whole portfolio.

Many younger investors chase the return. Some retirees, however, find a shortfall when they try to live on portfolio income. In response, they move money into stocks offering significant dividends or high-yield bonds – something you might regret in the long run. Taking retirement income off both the principal and interest of a portfolio may give you a way to reduce ordinary income and income taxes.   

6. Avoiding market risk. Equity investment does invite risk, but the reward may be worth it. In contrast, many fixed-rate investments offer comparatively small yields these days.    

7. Retiring with heavier debts. It is hard to preserve (or accumulate) wealth when you are handing portions of it to creditors.   

8. Putting college costs before retirement costs. There is no “financial aid” program for retirement. There are no “retirement loans.” Your children have their whole financial lives ahead of them. Try to refrain from touching your home equity or your IRA to pay for their education expenses.   

maze, retirement plan

9. Retiring with no plan or investment strategy. An unplanned retirement may bring terrible financial surprises; the absence of a strategy can leave people prone to market timing and day trading.

These are some of the classic retirement planning mistakes. Why not plan to avoid them? Take a little time to review and refine your retirement strategy in the company of the financial professional you know and trust.

Do you have your retirement plan in place? Set up your FREE initial consultation with Brent E Chavez today:

Schedule A Consultation

Learn more about Brent E Chavez, the Services We Provide, and Our Philosophy. Do you have any questions? Give us a shout: Contact Us, info@aeinvestmentsgroup.com, (215) 766-7002.

Citations
1 – forbes.com/sites/bobcarlson/2019/01/25/5-ways-to-maximize-social-security-benefits [1/25/19]
2 – fool.com/retirement/2019/12/11/4-steps-to-making-sure-youre-ready-to-retire.aspx [12/11/2019]
3 – ssa.gov/planners/lifeexpectancy.html [12/11/2019]

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

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