(704) 236-6615 scott@southernwa.com

How to Distribute and Preserve IRA Assets

The focus on retirement accounts is shifting

Yes, it’s still important to make regular contributions to take advantage of tax-deferred growth potential, and it’s important to maintain an asset allocation* to help you minimize your risk. But for those people nearing or just entering retirement, the focus is shifting from how to build a retirement account to how best to distribute the assets.

Whether you are managing your own IRA, choosing your beneficiaries, or dealing with inheritance issues, it’s time to start thinking about how to make sure those tax-deferred savings are not lost in the tangle of tax and estate issues that can get complicated very quickly in the distribution phase.

When you take money out of a Traditional IRA, that withdrawal gets included with your other income for the year and is subject to ordinary income tax (except to the extent the withdrawal represents a return of nondeductible contributions or other after-tax amounts). The longer you leave funds in these accounts, the more tax-deferred growth you can potentially accumulate.

Managing your own IRA

How much to withdraw—and when

You’re not required to withdraw money from a Traditional IRA until you reach age 701/2, and if you do it before you turn 591/2, there’s generally a 10% penalty tax on top of any income tax on the funds you take out. There are exceptions for taking an IRA distribution before reaching age 591/2 without the 10% premature distribution penalty if it is used for one of several life events or if “substantially equal periodic” payments are taken. These payments, made at least annually under one of the IRS approved methods and calculated based on life or life expectancy, can be taken at any age for any reason, provided you continue them for five years or until you reach age 591/2 — whichever takes longer.

Most IRA owners wait to withdraw funds until they reach age 701/2, when they must start taking required minimum distributions. Although the financial institution can calculate the distribution, you can also figure it out yourself by taking the account balance from December 31 of the prior year and dividing it by the factor applicable to your age (the age you will attain on your birthday in tire year in question) listed in the appropriate Internal Revenue Service table. These tables can be found in IRS Publication 590, available online at www.irs.gov/pub/irs-pdf/p590.pdf

You have a choice between taking your first distribution in the year in which you turn 70 ½ or delaying the first payment until April 1 of the following year, known as the “required beginning date.” But if you delay, you must take two distributions in the year in which you turn 71 ½ , which can push you into a higher tax bracket.

“Whether you should withdraw more than the law requires will depend on your finances and your long-term goals. In theory, your IRA has the potential to grow more quickly than other investments because it’s not being continually eroded by taxes” says Scott Reber CFP®, founder of Southern Wealth Advisors.

Investing IRA assets

When IRAs comprise a larger portion of your net worth, you need to look more closely at these accounts in the context of your risk tolerance and total asset allocation.
“No matter what the investment, withdrawals of taxable amounts from Traditional IRAs will be taxed as ordinary income, so you won’t have the benefit of the lower tax rates on dividends and capital gains, or the ability to offset capital gains against losses. But if you invest some of your IRA in stocks, you have the potential to achieve more growth, even after taxes, than you would with lower-paying fixed-income investments,” Reber says.

Handling an Inherited IRA

Many people will inherit an IRA from a parent or spouse. The strategies that surround these IRAs involve extending the period over which inheritors must take distributions. With a longer payout period, inheritors can reduce the amount of required minimum distributions which can reduce taxes and let the IRA maintain tax-deferred growth potential. Since inheritors, who are designated beneficiaries under the IRA, are generally able to take withdrawals based on their life expectancy under IRS tables, the younger the beneficiary, the longer the payout period.

Spousal rollovers

A spouse — assume it’s the wife — who inherits an IRA has a choice of whether or not to roll over that IRA into one she already owns. There are two advantages to rolling over the IRA to her own IRA. One is that it enables her to postpone taking distributions until she is 7O ½. The other advantage of this strategy is that the life expectancy table she would use to figure her required distributions would result in a longer payout period than the one that would apply if she remains as the beneficiary of her husband’s IRA.

For example, assume a 70-year-old wife inherits her husband’s IRA after he dies at age 70. If she leaves it in her husband’s name, she must take annual required distributions, starting the year after her husband’s death, over her life expectancy. At age 71, her life expectancy is 16.3 years, according to The Single Life Expectancy Table (for use by Beneficiaries), so she must withdraw about 1/16 of the IRA. Although her life expectancy will be recalculated each year based on her new attained age (so the IRA balance never goes to zero), the IRA would be substantially depleted by the time she reaches her late 80s. And after her death, her remainder beneficiaries would have to withdraw all remaining funds from the account over the remainder of the wife’s life expectancy at her death.

In contrast to this scenario, if the 70-year-old wife rolls over the IRA she inherited from her husband after he died at age 70, the assets have the potential to grow tax-deferred for a much longer period of time. In that case, her annual required distributions are computed using the “Uniform Lifetime Table.” Thus, the first year’s withdrawal will be about 1/27 of the account. Then, at her death, she can leave her IRA to the next generation, who can utilize the stretch-out option over one of their own life expectancies after her death.

So generally, for a surviving spouse, the spousal rollover can be a better choice than leaving the assets in the deceased spouse’s name and taking them as beneficiary. However, if a surviving spouse less than 59½ needs to withdraw from the account, she might want to delay doing the “roll-over” to her own IRA until after she reaches age 591/2, to avoid the 10% penalty tax.

Your retirement savings may be the primary source of your income when you retire. Southern Wealth Advisors can offer you strategies and guidance that seek to help successfully manage your income in retirement and preserve the wealth you’ve accumulated—for yourself and your heirs.

We are committed to helping you prepare for the future.

There is no assurance that the techniques and strategies discussed are suitable for all investors or will yield positive outcomes.

This information is not intended to be a substitute for specific individualized tax advice.  We suggest that you discuss your specific tax issues with a qualified tax advisor.

*Asset allocation does not ensure a profit or protect against a loss.

(704) 236-6615

Call Us!


One-Page Financial Plan

Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Independent Advisors Alliance, a registered investment advisor. Southern Wealth Advisors and Independent Advisors Alliance are separate entities from LPL Financial.

The LPL Financial registered representatives associated with this site may only discuss and/or transact securities business with residents of the following states: North Carolina, South Carolina, Florida, Michigan, California, Arizona, and Virginia.

Southern Wealth Advisors
18716 W Catawba Ave
Cornelius, NC 28031