If you are nearing retirement and have been saving diligently, the time is come to enjoy the fruits of your labor. Of course, you deserve the benefit of tax deferred savings, but the federal government may be just as interested in your money if you don’t withdraw it.
Indeed, it seems counterintuitive that you may be taxed for actually holding on to money, but the rules surrounding some tax deferred savings accounts (i.e. IRAs and 401(k)s) call for financial consequences in the event these funds are not used.
If you are turning 70½, the amount you are supposed to take out of your IRA is called the required minimum distribution(RMD). The RMD is based on an IRS formula tied to an estimate of how long you are supposed to live. To put this in perspective, the IRS believes that person who is 70 ½ may live for another 27.5 years. This means that a person with an IRA worth $600,000 would have to take out about $22,000 per year to avoid the tax penalty of 50 percent of the amount that was not withdrawn.
Not a good thing.
Making withdrawals may put you in a higher income tax bracket, but this is where a skilled tax attorney comes in. An experienced lawyer can help distribute the funds and reduce the tax effects on you. For instance, transferring funds from an IRA a Roth IRA could do this.
If you have questions about the taxes attributable to RMD’s, an experienced tax attorney can help.