Often a large part of an estate, traditional individual retirement accounts (IRAs) are subject to a hefty tax bite by Uncle Sam. There are, however, ways to reduce the amount of tax you have to pay. By under­standing the rules for payouts, getting organ­ized and following the guidelines in this report, you can hold on to more of your IRA nest egg.

Getting Your House in Order

The first step in reducing the tax bite of your IRA is to get organized:

2. List all of your retirement funds. Include pensions, 401(k) plans, IRAs, Roth IRAs and nonqualified plans. Note when you must begin to take withdrawals.
3. Calculate the income you can expect from each fund. Remember: Some accounts pay out when you retire, while others can be deferred until you reach age 70 ¹/2.
4. Determine how much you will need annu­ally to support yourself. The less you will need, the more flexibility you will have in making tax-smart payout choices.

Rules on Lifetime Payouts

Most distributions before age 59¹/2 incur a 10% early withdrawal penalty in addition
to ordinary income taxes, but there are excep­tions. Although there may be limitations, assuming you are the plan owner, you
will incur no penalty if distributions are a result of:

1. Death,
2. Disability,
3. Medical expenses,
4. Paying higher education expenses,
5. Making a first time home purchase (up to a $10,000 withdrawal), or
6. Taking distributions in a series of substantially equal installments.

After you reach age 59¹/2, but before your required beginning date (RBD) — April 1 of the year following the year in which you reach age 70¹/2 — you can take penalty-free distributions of any amount you wish. By your RBD, however, you must begin taking the minimum required distributions (MRD) or face a 50% penalty on the difference between the MRD and your actual distribu­tions. For example, if you should have with­drawn $12,000 and you only withdrew $9,000, you would pay a $1,500 penalty tax — 50% of the remaining $3,000.

You can either withdraw benefits in a lump sum or have installment payments made over:

1. Your life,
2. The joint lives of you and your desig­nated beneficiary, or
3. A defined period that does not extend beyond the life expectancies in (1) and (2).

Your beneficiary can be a person or a quali­fied trust. To be qualified, the trust must be valid under state law, be irrevocable at the time of your death and have identifiable
beneficiaries. You must notify the plan adminis­trator that you have named the trust as beneficiary.

Your minimum installment distribution is your account balance as of the end of the previous year divided by the appropriate life or joint life expectancy factors as determined under IRS tables. If the beneficiary is not your spouse and is more than 10 years your junior, joint life expectancy is determined
by your age and the age of a person 10
years younger, rather than actual joint
life expectancy.

Rules on Postmortem Payouts

After your death, distribution rules change. If you had not reached your RBD before your death, the five-year rule would apply. This means that the IRA would have to be fully distributed by Dec. 31 of the fifth year after your death. If your beneficiary is your spouse, he or she could elect instead to receive payouts over his or her life expec­tancy or to roll over the payouts into his or her own IRA. These are not options for non­spouse beneficiaries.

If you had reached your RBD, the remaining portion of the IRA would have to be distrib­uted at least as rapidly to your beneficiary as it would have been distributed under the method you had elected. If your spouse is the beneficiary, he or she could roll over the pay­outs into his or her own IRA.

59¹/2 to 70¹/2 — 11 Golden Years

The key years for tax planning for your IRA payouts is between the ages of 59^<1/2 to 70¹/2. During this time, withdrawals are allowed without penalty and minimum withdrawals are not required. Don’t pass up this oppor­tunity — it may be wise to make withdraw­als just to avoid required withdrawals later that may be taxed at a higher rate.