IRA Distribution Mistakes

IRA Distribution Mistakes – and how to avoid them

The following are common IRA distribution mistakes.  Many times the mistakes are easily avoidable – and can even cut your taxes on IRA withdrawals.

Never take more than required from your IRA or retirement plans
You own two buckets of money:  money that’s been taxed (“regular money”) and money that has not been taxed (“IRA money”).  When you spend $1 of regular money, the cost is $1.  When you spend $1 of IRA money, the cost to you is about $1.33 because you need to pay approximately 33% of income tax on the amount you withdrawal.  Therefore, to reduce your taxes consider not withdrawing anything more than the required distribution from your IRA money, even if it means spending regular principal for living expenses. Note that withdrawals from Roth IRAs are not subject to taxes is certain conditions are me. Learn more about Roth IRAs withdrawals.

Mistakes in selecting beneficiaries
Most people select their spouse (or children) as beneficiary for their IRAs.  As simple as this seems, it can create problems.  When you leave an IRA account to your spouse, it inflates his or her assets – and if he or she later dies with an estate exceeding $2.0 million (the estate exemption limit for 2007), they pay estate tax.  One solution is to leave your IRA to your estate. The problem is at your death, the IRS requires the account to be rapidly distributed rather than enjoy the potential stretch over the lifetimes of the beneficiaries.

The answer to these issues would be to leave your IRA in a trust and appoint a trustee (normally an accountant, financial advisor, attorney, etc.).  Within the boundaries of your wishes and IRS-required minimum distributions, the trustee can be empowered to decide who among your beneficiaries will get the IRA and how much they get.