By Peter Sweetser
There are several items to consider before taking a distribution from a tax-deferred account such as a Traditional or Roth IRA. First, a Traditional (“deductible”) IRA withdrawal is considered ordinary income. Typically, the entire distribution is taxed as ordinary income. Distributions to shareholders younger than 59½ may also be subject to a 10% IRS penalty unless an exception applies. Second, a Roth distribution is tax-free if you have met the necessary requirements like owning the account for five or more years and being 59½ or older. Please note: if you take money from a regular (taxable) non-retirement account, such as a single or joint account, you may be subject to capital gains taxes.
Let’s say you need $5,000 to take a vacation. If you withdraw it from the Traditional IRA and you’re in a 30% tax bracket, you would incur $1,500 in taxes. However, the Roth distribution could be tax-free. Meanwhile, your taxable single or joint account may be subject to capital gains tax on proceeds above your original cost at rates ranging from 0% to a maximum of 15% for long-term gains. Each scenario has different tax ramifications and your decision should be based upon your situation at any given time.
Due to the complex IRA distribution rules, one size does not fit all so please call me at 800-932-3271 or e-mail firstname.lastname@example.org to discuss what might be right for you. As always, I recommend including your accountant or tax preparer before you make a transaction.