avoid taxes on ira withdrawals
There are plenty of ways to minimize your tax liability and that’s especially true when you have worked hard to sock away retirement money. Tax advisors are constantly searching for new ways to avoid paying taxes on IRA withdrawals. There are legal strategies you can use to at least minimize the taxes you pay on your individual retirement account (IRA) contributions, but it may be a good idea to speak with a financial advisor before going all in on any one strategy. Try using SmartAsset’s free advisor matching tool to find advisors that serve your area.
Roth IRA and Traditional IRA
If you are planning your retirement and you find yourself asking, “How can I avoid paying taxes on my IRA withdrawal when I retire?” plan ahead and open a Roth IRA instead of a traditional IRA. A traditional IRA is funded with your pre-tax dollars, and you pay taxes when you withdraw the funds. A Roth IRA, however, is funded with after-tax dollars. Since you have already paid taxes on your Roth IRA money, you don’t have any tax liability when you someday withdraw the funds.
What if an emergency happens and you need to make an early withdrawal from your IRA? You still won’t pay any taxes on a Roth IRA if you withdraw only your contributions. If you start withdrawing your earnings from your money then an early withdrawal will trigger taxes. You will have to pay a penalty of 10% on both types of accounts if you withdraw before you are 59 1/2.
There are some hardship exceptions regarding the early withdrawal penalty and taxes. You don’t have to pay a withdrawal penalty in these situations, but you may have to pay taxes, depending on the circumstances:
Your first home – You can early withdraw up to $10,000 from an IRA without penalties if you put the money toward buying your first home.
Health insurance – If you become unemployed and you need to purchase health insurance, you can make a penalty-free early withdrawal.
Military service – If you are called up for military service, or join the military, and serve at least 180 days of active duty, you can make a withdrawal while you are on active duty but not after.
College expenses – You and members of your family can make an early withdrawal for college expenses like tuition, and room and board and books and supplies.
Medical bills – If you have medical bills that are over 10% of your adjusted gross income, you can make early withdrawals to pay them.
Disability – If you become disabled, you are eligible to take early withdrawals.
Tax lien – If the Internal Revenue Service (IRS) places a tax lien on your property because you owe back taxes, you can withdraw from your IRA to pay your back taxes.
If you take one of these exemptions, be sure and use the money from the IRA for exactly what the exemption provides for, otherwise you may be in trouble with the IRS.
Tax Implications of Having Multiple IRAs
avoid taxes on ira withdrawals
Having multiple IRAs can be justified by several investment strategies. If you have a traditional IRA, funded by pre-tax dollars, and a Roth IRA, funded by after-tax dollars, you may have a winning tax strategy. You can use your yearly contribution to your traditional IRA to reduce your current taxes since it can be directly subtracted from your income. Then, you can use what you deposited into your Roth IRA as access to have tax-free income in retirement.
You can also use multiple IRAs for investment in different asset classes. For example, some investors put their stocks in one IRA, bonds in another and alternative assets like cryptocurrency into a self-directed IRA. This allows the investor to do some analysis concerning the type of asset most beneficial to them.
Instead of having multiple IRAs, you might have a Roth IRA and a brokerage account. If that is your situation, fund your Roth IRA with dividend-paying stocks and bonds that pay interest. Since dividends and interest are taxed at ordinary income rates, you will minimize your tax liability more than if you had those assets in a brokerage account. Put your growth financial assets in the brokerage accounts where you will pay the lower capital gains tax rate when you withdraw them.
Roth IRA Conversion
A Roth IRA conversion is the process of converting your traditional IRA account to a Roth IRA account. The Roth IRA will not require payment of taxes on any distribution after the age of 59 1/2. However, the process of converting the traditional IRA to a Roth IRA creates a taxable event. If you expect your tax bracket to be higher in retirement than it is now, it may make sense to convert your traditional IRA to a Roth IRA. Another strategy is to convert a portion of your traditional IRA to a Roth IRA in years when you expect to be in a lower tax bracket.
There are other strategies that can help you avoid paying taxes on IRA withdrawals, some of which might fly under the radar. For example, you can make donations of securities out of your IRA to a public, approved charity and take up to a 30% tax deduction. If your contribution exceeds the $100,000 per year limit, you can carry it forward for up to five years.
You can also take advantage of the standard deduction. If your taxable income is $0, then you can withdraw the approximate amount of your standard income tax deduction before you are taxed. This amount is around $20,300 if you are married with no dependents.
A qualified longevity annuity contract (QLAC) is another option. A QLAC is essentially an annuity within your IRA that you set up to minimize your tax liability. When you set up a QLAC, you exempt 25% of your required minimum distribution requirements up to a maximum of $130,000. This annuity will last until you are age 85, so it may be worth the premium you have to pay to set it up.
avoid taxes on ira withdrawals
These are some of the strategies you can use to minimize the taxes you will pay when you withdraw money from your IRA. Possibilities involve converting traditional IRAs to Roth IRAs, having multiple IRAs, donating securites from an IRA to a charity or setting up a QLAC. Since many of them involve some complexities, you may want to see a financial advisor so you don’t take the chance of being stuck with a large tax bill at the end of the year.
Tips on Retirement
A financial advisor can be a huge help when it comes to retirement planning. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Check out SmartAsset’s retirement calculator if you’re looking to plan for retirement on your own. You can use it to determine how much money you may need in retirement.
Photo credit: ©iStock.com/RealPeopleGroup, ©iStock.com/designer491, ©iStock.com/shapecharge
My children have inherited $5 million of stock from their father (whose estate has not yet been dispersed after 11 months) leaving them with a 30% or so loss of value over which they have had no control. Is there … Continue reading → The post Ask an Advisor: My Kids Inherited $5 Million. How Should They Handle It? appeared first on SmartAsset Blog.
Congressional Democrats want to slam shut a tax loophole known as the “backdoor” Roth IRA. In one of several proposed changes that target the retirement accounts of wealthy Americans, Democrats on the House Ways and Means Committee want to prohibit people … Continue reading → The post Democrats Want to End This Lucrative Retirement Account Loophole appeared first on SmartAsset Blog.
Though retirees are only required to take a certain portion of their retirement savings out as distributions each year, a study from JPMorgan Chase shows that there is likely good reason to take out more. A withdrawal approach based solely on … Continue reading → The post 84% of Retirees Are Making This RMD Mistake appeared first on SmartAsset Blog.
(Bloomberg) — International Business Machines Corp. said it would report a $5.9 billion one-time pretax charge in the third quarter as a result of an agreement to offload pension obligations to two life insurers.Most Read from BloombergTerra Co-Founder Do Kwon Faces Arrest Warrant in South KoreaUS Inflation Tops Forecasts, Cementing Odds of Big Fed HikeStocks Rise as Dip Buyers Win Tug of War Over Fed: Markets WrapXi Returns to World Stage With Putin to Counter US DominanceUgly Selloff Pushes S
The U.S. inflation rate rose 0.1% in August compared to July as measured by the U.S. Labor Department’s monthly Consumer Price Index. Seemingly endless waves of high CPI numbers have caught up with consumers where it matters most – in their paychecks, which largely aren’t keeping up with inflation. According to new data from Bankrate, 55% of working Americans report their income power is waning, especially in terms of household expenses.
Net worth is a financial metric that can help you keep your individual picture of your finances in perspective. The average net worth by age, in this case, refers to the net worth of the households in the U.S. divided … Continue reading → The post Average Net Worth by Age appeared first on SmartAsset Blog.
Cathie Wood’s ARK Innovation ETF was tumbling Tuesday morning as technology stocks slumped amid concerns that a stronger-than-expected inflation reading Tuesday will lead to more aggressive interest rate hikes by the Federal Reserve. Shares of ARK Innovation were down 6.3% Tuesday morning, while the Technology Select Sector SPDR Fund fell 3.8%, FactSet data show, at last check. The U.S. stock market is broadly selling off after the U.S. Bureau of Labor Statistics reported Tuesday that the consum
I have $950,000 invested with a large financial firm, but they are charging me $1,100 a month in management fees. Is this reasonable?
“A standard full-service broker-dealer typically charges anywhere between 1% and 2% in management fees, on top of any fund-specific expenses, trading fees and commissions,” explains certified financial planner Jay Abolofia of Lyon Financial Planning. If you like your bank, but want to pay less, open a line of communication with them.
According to the latest CPI (consumer-price index) report, U.S. inflation cooled down slightly from July but not enough to appease the markets. Overall prices rose by 8.3% from the same period a year ago, slowing down from July’s 8.5% uptick and further down from June’s 40-year high showing of 9.1%. On a monthly basis, after plateauing in July, consumer prices rose by 0.1%. As the expectation was for a rise of 8.1% over last year and a drop of 0.1% compared to last month, the markets did what th
Mike Dawson, 54, a lobsterman in Maine, started saving for retirement in his mid-to-late 20s with an individual retirement account. “I save better than I invest,” said Dawson, who learned the discipline of saving for retirement from his father, who was also self-employed. Dawson figures he has about 10 more years until retirement—when his body wears out from the rigors of lobster fishing and when his pool of retirement savings and investments will be enough.
The president of Michigan State University, who was hired in the wake of the Larry Nassar sexual assault scandal, acknowledged a “moment of uncertainty” on campus amid tension with the school’s governing board and some calls for his departure. Samuel Stanley Jr., who has been president since 2019, defended his administration’s handling of the resignation of the business school dean during an appearance Tuesday night at the Faculty Senate. “I want to thank everyone for their messages of support and encouragement and to those who spoke in public supporting the provost and me,” Stanley told faculty leaders, referring to Michigan State’s chief academic officer.
Yahoo News UK
New research has thrown doubt on the theory that the dinosaurs were wiped out solely by a mountain-sized asteroid – instead pointing the finger elsewhere.
In a world where the stock market is unpredictable and interest rates are rising, many investors are looking for someplace to put their money that is as close to risk-free as possible – even if it means forgoing the chance … Continue reading → The post How to Buy More than $10,000 in I Bonds Through This Loophole appeared first on SmartAsset Blog.