IRA Reminder
Thanks to his diligence, Mr. Jurek has saved a significant amount that will ensure him a carefree retirement. Now, he just needs to make sure he doesn’t unnecessarily lose some of his funds to taxes.
An Individual Retirement Account (IRA) allows you to deduct contributions from your tax base and defer taxes on income from that account. It also protects assets from creditors.
We always have access to our money in a retirement account, but the IRS encourages people to keep their money there by imposing a 10% penalty (early withdrawal penalty) on impatient individuals who have not reached 59.5 years of age.
Selected amounts are added to our income and possibly subject to income tax depending on the tax bracket.
Complete IRA Liquidation
After reaching 59.5 years of age, we have the full right to dispose of our money as we wish. We can even withdraw all of it at once, which is called a lump sum distribution, but this is impractical due to high taxes.
Example: Let’s say that over the years, $10,000 has accumulated in our IRA. If we liquidate the account completely, our income for that year will increase by $10,000, we will be in a high tax bracket, and we will pay high federal and state taxes.
Exceptions to the Early Withdrawal Penalty
We must pay income taxes on amounts withdrawn from IRA retirement accounts, and if we have not reached 59.5 years of age, we will additionally have to pay a 10% penalty (early withdrawal penalty). There are several situations where the 10% penalty does not apply. These include: unforeseen circumstances, distribution in a series of equal installments, a 60-day loan from an IRA, purchase, construction, or renovation of a first home, incurring the cost of higher education for the taxpayer or their children, payment of health insurance for the unemployed, medical expenses exceeding 7.5% of Adjusted Gross Income, adoption of a child, call to active military service for a reservist.
These exceptions are explained in detail in the book American Pensions, which also discusses other retirement programs for employees and self-employed individuals.
Gradual Withdrawal of Money
After reaching 59.5 years of age, we can withdraw money from an IRA, or leave it there. If we don’t need the money for living expenses, we should keep it well-invested in an IRA (in a bank or mutual fund) so that it accumulates with tax deferral for as long as possible.
The most advantageous way to withdraw funds from a retirement account is gradually, so as to pay as little tax as possible, i.e., when our income is as low as possible, which is during retirement.
Ask your accountant what withdrawal is optimal for your financial situation.
Required Minimum Distribution
Upon reaching a certain age, the owner of a retirement account (IRA, 401(k), deferred compensation) is obligated to start withdrawing a minimum amount calculated to empty the account during their lifetime. This is called Required Minimum Distribution (RMD).
The SECURE 2.0 Act, which came into effect on December 29, 2022, allows for the delay of mandatory withdrawals from retirement accounts according to the following schedule: 73 years starting from January 1, 2023, 74 years from January 1, 2030, and 75 years from January 1, 2033.
Mr. Jurek does not need to worry or come to the States specifically. The financial institution where he holds his IRA account is obligated to inform him about the RMD requirement and calculate the amount of withdrawals. Mr. Jurek does not have to withdraw cash, but can instruct the bank to automatically transfer funds to another, normal (non-retirement) account, e.g., a savings account or money market account.
Conclusions
It pays to use the funds accumulated in IRA and other retirement accounts as slowly as possible, so that the money lasts a lifetime, especially since the capital remaining in the IRA account grows with tax deferral.
It is worth liquidating an IRA in such a way as to minimize income taxes. Since Social Security retirement benefits are not taxable for moderately earning individuals, seniors can have other income of $6,550, and a senior couple – $32,300 annually (in 2024) and still not have to file a tax return. This means that a person who only has Social Security retirement or disability benefits can withdraw such amounts from an IRA account completely tax-free. Withdrawals can be made at the end of December and immediately at the beginning of January of the following year, because calendar years are counted.
