2016 is a big year for individual retirement accounts (IRA). Why? Because the first wave of U.S. baby boomers are turning 70 this year. That means they can begin taking mandatory withdrawals from their IRAs. Laura Sanders wrote a fantastic article for the Wall Street Journal about the complexities and tricky issues associated with mandatory withdrawals. She highlighted these challenges by following the withdrawal adventures of Natalie Choate, a Harvard Law graduate who literally wrote a book about IRAs and estate planning.
Ms. Choate became eligible for her first mandatory withdrawal from her IRA and realized it was not as simple as she was anticipating.
“Now I have sympathy for average people facing these decisions,” she says.
We recommend you discuss your options with your financial advisor and ensure you have the best plan in place to meet your retirement goals. However, here are some important questions that you and your loved ones should consider.
- Should you consolidate your accounts into a single IRA or maintain multiple accounts? Some people advocate for a single account since it is easy to manage and reduces potential fees. Others argue that multiple accounts may be the best strategy to diversify the characteristics of your retirement portfolio. For example, Ms. Choate used assets in one IRA to purchase an IRS-approved “longevity annuity” with no required withdrawals until age 85.
- Have you prioritized which account payouts will come from? If you own multiple IRAs, you do not have to take a proportional payout from each account. You can withdraw money unevenly if there is more cash in one account than another, or you can even take the entire payout from one IRA.
- When should you schedule your payouts? As an IRA owner, you have until April 1 of the year after the year you turn 70½. This means people turning 70 today have untilApril 1 2017 to take a required withdrawal. After that, the annual deadline for a mandatory withdrawal is December 31. You can choose to receive periodic payments or a lump sum (but watch out for a big tax bill if you go with a lump sum).
- Can you use your requirement withdrawal on a charitable gift? Yes, you can use your IRA funds to make a charitable transfer. In fact, it is considered a highly tax-efficient strategy. You can give as much as $100,000 in cash from an IRA to charity and have the donations count as part of your required withdrawal. The withdrawal will not increase your adjusted gross income (AGI), which is importance since your AGI is the trigger for various tax provisions like the 3.8 percent surtax on net investment income.
- Have you recently reexamined your listed beneficiaries? Remember, your listed beneficiaries on these plans will trump anything you have in your estate planning documents. It is important to examine your listed beneficiaries and make sure they match up and coordinate with your estate planning goals.
As you can see, effective IRA investment and fund withdrawal s are critical for maximizing the funds you worked so hard to save. This is why you need to sit down with an experienced estate planning lawyer in your area, and your financial advisor to talk about how IRAs should be incorporated into your long-term investment and retirement strategy.