When should I start receiving income from my IRAs and how will that affect my taxes?

Taxes do not automatically go down in retirement.  The government owns part of your IRA and whether it is distributed during your lifetime or to your heirs after your death, the government will take its portion first and you get what is left.  

There are many mistakes that can be made when withdrawing money from retirement accounts.  I call them Too Soon, Too Late, Too Little, and Too Much.  Any of these violations can result in penalties in addition to taxes.  

First, be aware of taking money out of your IRAs Too Soon.  There is a federal tax penalty of 10% of any amount withdrawn before you are 6 months past your 59^th birthday.  With very few exceptions you should avoid withdrawals prior to age 59 ½.   We generally recommend you let your tax-deferred accounts grow as long as possible.  

In most cases all the money you withdraw from an IRA is subject to ordinary income tax.  If you have an IRA where you made non-deductible contributions this is an exception.  It adds another step to computing your tax, but it is worth the effort.   You certainly do not want to forget that you paid taxes on your contributions and then pay taxes again when you take the money out.  

You must draw at least the Required Minimum Distribution by the calendar year you attain age 70 ½ and every year thereafter.  The penalty for missing this deadline is 50% of the amount you were supposed to withdraw plus taxes, so it is important to know when you must begin to withdraw from your IRA.  The amount to withdraw is determined by a government life expectancy table.  Contact our office for help with this calculation.

The decision to start withdrawing income from your IRA should be coordinated with your total retirement income plan and you should consider all sources available to you such as social security, a pension, and other investments and develop the most tax efficient plan possible.  

The tax rules surrounding your IRA distributions are complicated and mistakes can be very costly.   This is why an advisor who can integrate tax planning with your investment strategy can be so invaluable.   Only looking at your taxes as a historian can be expensive.  It pays to be proactive and avoid a surprise on April 15^th!   Seeking professional advice before making these major decisions could save you a lot of money.  The Team at Guelich Capital is here to help.  Give us a call today.  540-772-4545.   

Written by Connie C. Guelich, CFP, AEP, CLU, ChFC.  This represents our views at the time of this writing, and it is subject to change.  It is not intended to be personal investment advice.   If you would like to discuss your own account, please don’t hesitate to call us.  We are here to help and welcome your call.