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.
But Reber suggests considering a different strategy for people with a net worth of $25 million or more. In general, they should consider drawing down their retirement accounts before spending other assets — either by withdrawing the funds themselves, or by giving them to charity. Reber reasons that retirement assets, which tend to comprise just a small portion of the balance sheet of high net worth people, “are among the most encumbered and difficult ones to estate plan with. What’s more, since funds coming out of these accounts are taxed as ordinary income, you don’t get the benefit of the lower tax rates that apply to dividends and capital gains,” he says.
On the other hand, the tax law now provides opportunities for people who have deferred taking tax-efficient withdrawals. For example, as of January 1, 2016 IRA owners can convert a Traditional IRA to a Roth IRA regard-less of their income. With time, we may also see more generous provisions for lifetime gifts of IRA assets to charity.
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.