How to Plan for IRA Distribution and Taxes
Planning for your retirement is no easy task. If you are young, it most likely seems like light-years away. However, it pays to do your best to plan ahead for taxes you will pay on your IRA. You need to be aware of how to avoid certain tax penalties and think about distribution methods and the date at which you are required to start receiving payments.
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Instructions
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Ask your IRA custodian to explain any tax ramifications that may occur at any point in your retirement planning. She can explain the accounts for which you qualify, taxes you will owe and penalties you may face. For example, you will encounter a 10 percent penalty on a traditional IRA for money withdrawn before age 59 1/2.
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Choose a beneficiary who is considered "designated" by the IRS. This will prevent your IRA being left to your estate when you die. In this case, whoever inherits your estate will owe taxes based on the value of your IRA's assets.
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Keep copies of all reports and other information that you receive about your IRA plan and store them with your will. In the event of your death, this information is legally necessary to disburse an IRA, especially if you have rolled over other accounts in the past.
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Report your IRA as income on your income tax return. IRS instruction booklets include worksheets that tell you which forms you need to file (see Resources below). Failing to do so can result in penalties or a possible audit.
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Choose your distribution option before the age of 70 1/2 years old. You may choose to take the minimum amount to save money, or you can take a lump-sum payment if you require the funds.
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Wait, if possible, until you reach your required beginning date (RBD) before withdrawing funds from your IRA. This will extend the tax-deferral status of your account and makes it more likely that you will not outlive the balance of your IRA.
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Tips & Warnings
Very little of what you plan for now with your IRA is set it stone. Some decisions will become irrevocable at your RBD (required beginning date), though, so make the most informed decisions you can regarding beneficiaries and distribution methods before reaching 70 1/2 years old.
