What Are the Rules for Cashing in an IRA?
IRAs provide tax-deferred growth, and can be an ideal way to save for retirement. But before withdrawing funds, there are rules to follow and adhere to.
Early distributions from traditional IRAs typically incur taxes and penalties, although there may be exceptions.
Discover more by talking with a NYLIFE Securities financial services professional.
Taxes
Contributing pretax money into an IRA account allows you to defer taxes until withdrawing funds – withdrawals typically fall under ordinary income but exceptions exist in some instances.
Most cash distributions from an IRA are subject to federal withholding at an initial default rate of 10%, though you can choose for different amounts to be withheld or even opt out altogether.
Individuals aged 73 or over are required by the IRS to take annual minimum distributions (RMDs). Due to complex RMD rules, it’s recommended to seek assistance from an IRA specialist when planning distributions.
There are some withdrawals from an IRA that aren’t tax-taxable, including medical expenses, unemployment compensation and housing costs for disabled individuals. Furthermore, permanent disabled people can withdraw funds without incurring penalties if they use them to cover permanent disability expenses in the year of loss of ability to work and use these funds as intended for permanent disability expenses.
Penalties
Typically, the IRS levies a 10% early withdrawal penalty if money is taken out of an IRA before reaching age 59 1/2. There are however certain exceptions to this rule that could void or reduce this charge.
One exception allows you to access your IRA without incurring penalties if the proceeds are used to pay health insurance premiums for yourself and/or family. Unemployed people can use their IRAs as payments towards unemployment compensation payments.
An additional exception allows you to access your IRA funds without penalty in order to pay qualified higher education expenses for yourself, your spouse and/or children. Such expenses include tuition fees, books and equipment necessary for enrollment as well as room and board costs.
Once you reach 70 1/2, retiree IRA account owners must begin taking required minimum distributions (RMDs). These RMDs are calculated using IRS tables. As an alternative, qualified charitable contributions may fulfill your RMD obligation.
Rollovers
IRS rules regarding IRA rollovers vary depending on how and where your distribution comes in, as well as the type of account being transferred over. Direct rollover is considered the safest form, where your distribution takes the form of either an electronic transfer between custodians or direct checks made payable directly to the new account holder; such transactions do not count as income since it never actually touches your hands.
Unless your distribution is an indirect rollover, you have 60 days from receiving it to deposit it into a new IRA before the IRS considers it as a taxable withdrawal and you could incur taxes and penalties.
An indirect rollover option allows your former employer to withhold 20% of your distribution to cover federal taxes and penalties, leaving you 60 days to come up with the amount needed to complete it yourself. Otherwise, the IRS could impose taxes or penalties.
In-Kind Distributions
An in-kind distribution allows you to withdraw IRA investments at their current market value and move them into a taxable investment account, fulfilling any required minimum distributions (RMD), realizing net unrealized appreciation strategies or seizing opportunities such as depressed securities.
Use of this method also saves on taxes associated with liquidating assets, for instance when an IRA must sell assets to meet RMDs, they are taxed at current income rates whereas moving them from an IRA into a taxable brokerage account allows them to be taxed at lower capital gains rates upon sale.
This strategy can be especially helpful with illiquid assets like real estate, precious metals and fine art; however, it is essential that investors work with an advisor who is familiar with their individual financial goals as well as potential tax ramifications.
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