Deductible IRAs
With a traditional IRA, once you reach age 59½, the threat of the 10% penalty disappears. You can withdraw as much from your regular IRAs as you want, penalty-free. Cash coming out of the account is taxable in your top tax bracket, except to the extent that it represents a return of nondeductible contributions.
You can cash in your IRA all at once, but doing so could subject you to an enormous tax bill. You'll probably do better tax-wise by taking out as little as necessary each year.
Not only does that hold down the tax bill you owe each year, but it also leaves more money in the tax shelter to enjoy continued tax-deferred growth.
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But this tax shelter does not last forever.
Regular IRAs were created to help you accumulate money for your retirement -- not build up a pile of money for your heirs to inherit.
So, the law demands that you begin pulling money out when you reach age 70½. The minimum withdrawal schedule is designed to get all your money out -- and taxed -- by the time you die, or at least by the time your designated IRA beneficiary dies.
If you don't take out the minimum required each year, the IRS will claim 50% of the amount you fail to withdraw. (Calculate your minimum required distribution.)
Roth IRAs
Things are a lot easier with Roth IRAs, thank goodness. Once you reach age 59½ and the account has been opened for at least five years, you can take as much or as little from your account as you need -- all tax- and penalty-free.
You don't have to worry about a minimum distribution schedule, either. You never have to take a dime out of your Roth IRA. Unlike regular IRAs, a Roth IRA can be used to build up a stash of cash to leave to your heirs.
Passing your IRAs on
What if the IRA owner dies while there's still money in the tax shelter?
There's no early withdrawal penalty for your beneficiary, regardless of your age when you die or the beneficiary's age when he or she withdraws the money.
With traditional IRAs, withdrawals are taxable to the beneficiary (except to the extent that it represents nondeductible contributions) in his or her top tax bracket. That could create a substantial tax bill if the IRA is cashed in all at once.
The heir may be better off leaving the money in the IRA to continue taking advantage of the tax shelter. Of course, the IRS has something to say about that. The rules are complicated and set a minimum pace at which the money must be withdrawn and taxes paid.
With Roth IRAs, the money goes to your beneficiary tax-free. However, there is a minimum withdrawal schedule for heirs -- but again, withdrawals are tax-free.
A special surviving spouse rule also applies to both types of accounts. If the widow or widower is the beneficiary, he or she can claim the account as his or her own. If it's a traditional IRA, no withdrawals would be required until the new owner is 70½; if it's a Roth, the spouse would never have to tap the account.
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