What Are the Rules for Cashing in an IRA?
Some investors have IRAs filled with “sticky cash”, which isn’t conducive to long-term investing as this cash sits dormant in their accounts and loses value through taxes and penalties.
Lower-income savers may be eligible for assistance from the government through the Saver’s Credit on their tax returns, helping their IRA grow.
Required minimum distributions (RMDs)
At RMD age, the IRS mandates that you withdraw an annual set amount from your retirement accounts. Your RMD can be calculated by dividing your prior-year end balance by an age-based life expectancy factor from its Life Expectancy Tables and subtracting this figure from 1.
If you fail to withdraw your required minimum distribution (RMD), the IRS imposes a 25% penalty (or 10% if corrected within two years). Your account custodian may be able to calculate it for you.
Your RMD may or may not need to cover living expenses, in which case it could remain invested and grow tax deferred. However, if it will be used to cover such costs it’s important to understand its tax ramifications; your financial advisor can assist with this decision.
In-kind distributions
In-kind distributions provide investors with a way to move securities between IRA and taxable accounts without selling them, thus resetting their basis and potentially lowering future tax bills.
One major drawback of in-kind distributions is their effect on your tax bracket: adding their fair market value can push you into higher tax brackets and require federal and state withholding taxes, posing significant additional expenses.
An in-kind distribution may be beneficial in certain instances, such as paying medical insurance premiums or qualifying education expenses. When making this decision, consult a financial professional in order to understand these rules and ensure your in-kind distribution meets with your long-term goals and benefits your retirement savings as much as possible. Understanding all the options will enable you to maximize the returns from your retirement savings account.
Early withdrawals
Individual retirement accounts offer tax advantages to those who save funds over the long term, yet it’s crucial that individuals understand how these accounts treat withdrawals – missing an RMD or taking premature withdrawals can result in penalties from the IRS.
Exemptions to the early withdrawal penalty include total and permanent disability or terminal illness, unreimbursed medical expenses that exceed 7.5% of adjusted gross income or purchasing your first home without incurring penalty payments. Additional exemptions exist for those receiving unemployment compensation for more than 12 weeks or actively serving in the military.
When withdrawing funds from an IRA that don’t meet an exemption criteria, income taxes and an early withdrawal penalty of 10% must be paid. Withdrawals not made for qualified expenses or hardships may also cause your tax bracket to rise and could put you into more costly ones in the future.
Taxes
Money you deposit into an IRA is typically tax-deferred income; when you withdraw it, however, it becomes ordinary income subject to IRS taxes on previously deducted contributions and earnings that were untaxed IRA assets (UBTI). There are exceptions to this rule for active-duty military members called up for over 180 days duty or those suffering a permanent disability and no longer working.
The IRS permits distributions from an IRA account for qualified expenses, such as unreimbursed medical care costs that exceed 7.5% of adjusted gross income and first-time homebuying expenses. Self-employed or small business owners who use an IRA to make charitable distributions directly from their account can also use an IRA distribution for this purpose; while withholding rates must be applied (maximum is 15% withheld or you can waive altogether). Withholding on cash distributions must also be applied; but higher rate withholding can be chosen or even waived altogether depending on your preferences for cash distributions from cash IRA distributions from accounts using cash IRA distributions. Withholding rates can also apply depending on whether cash distributions require withholding, or waive it altogether depending on whether cash distributions will occur or not be made.
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