By Jeffrey Dixon, MBA, CISP
You read articles every day on growing your wealth. There is much written about the best ways to grow IRAs, detailing the best investment assets or which strategy will best boost the growth. As a result, your portfolio grows and you build your wealth. Keep in mind it is also important to understand what happens when you start taking distributions from your IRA. You can read more about taking distributions from your IRA on the IRS’s website HERE.
EARLY DISTRIBUTIONS:
You can take a distribution at any time from the IRA. However, if you are under the age of 59 ½, you face a 10% penalty for the distribution. You will pay taxes on the distribution as well. The amount you withdraw will be added to the rest of your taxable income for the year. You pay taxes at whatever tax bracket this total of income puts you into.
It is important to understand that taking a distribution before you are required to will impact the growth of the IRA. Money you take out of the IRA is no longer available to be invested.
YOUR BENEFICIARY:
When the IRA is set up you must choose a beneficiary. This is the person who inherits the IRA when you pass. You can have more than one beneficiary. You can name primary and contingent beneficiaries. Primary beneficiaries are the people who would receive the money. A contingent beneficiary would receive the money if the primary beneficiary passes before the account holder. The contingent beneficiary would then automatically become the new primary beneficiary. You can also choose a trust or other organizations to receive the IRA funds. A spouse can choose to put the funds into their own IRA or set up an inherited IRA. Anyone else must set up an inherited IRA.
There are new rules regarding taking distributions that Congress passed last year. You must take Inherited IRA funds within 10 years, unless the beneficiary is a minor. A minor must distribute 10 years after reaching age 18. If a spouse moves the funds into their own IRA, they do not have take the funds out in 10 years.
REQUIRED MINIMUM DISTRIBUTIONS (RMD’s):
At age 72, the mandatory distributions must be taken. It used to be at age 70, however this was changed by Congress last year. If you do not take a mandatory distribution, you will pay a 50% penalty of the amount that should have been taken. Tax laws are complex. Working with a competent tax authority to compute the required amount can be in your own best interests.
Taking an RMD is a “withdrawal”. You will find a withdrawal tab on your dashboard when you log into your account. Complete that online form and then revisit your account to ensure funds have been disbursed. We will issue a 1099 to you for that tax year to provide to your tax advisor. You will find a RMD worksheet to calculate your Required Minimum Distribution from your own IRAs, including SEP IRAs and SIMPLE IRAs HERE.
Have question? We are always happy to help you and answer questions about using your Self-Directed IRA. You can also find information on our website. Feel free to call us at 714-831-1866 or email us at info@uDirectIRA.com.
