By Steve Hauser
I hate tax season, but it’s here, so let’s cover some tax issues. First and foremost, consult with a tax specialist to save headaches in the future. The laws constantly change and you never know what you don’t know.
At age 59 1/2, we can begin taking distributions from our IRAs without penalty. The general idea is to not draw money out but rather leave it invested to grow. When you do take money out, you will be taxed at your current tax rate. If you take it out before 59 1/2, there’s a 10% penalty, so unless it’s an emergency, don’t do it.
At age 70 1/2, we’re required to begin taking distributions. The annual amount is based on age and size of the account. Most brokerage firms calculate this automatically and it should be posted on their website. It’s commonly referred to as RMD (required minimum distribution).
Roth IRAs have already been taxed. There are rules and timelines but when you take a distribution, it should be tax free.
Inheriting an IRA requires extra care. If the IRA came from your spouse, you can simply take the account assets right into your own and the distribution ages listed above will apply. If the IRA is from anyone other than a spouse, it should be transferred into an Inherited IRA and kept separate from other accounts. Regardless of age, the IRS wants distributions to begin soon. Get help with this as there are different ways to play.
Beyond IRAs we have taxable brokerage accounts. The big taxable issues are interest, dividends and capital gains. For the capital gains, simply find the difference of the price paid and the price sold. Again, most brokerage firms will have this information and provide it to you on a form called a 1099. If an investment is inherited the original cost is hardly ever found so look into something called Step-Up cost basis. It will save you money.
Last word on taxable accounts. Avoid buying mutual funds towards the end of the year. Research ‘dividend selling’ if you need to know why.