Learn when and how to receive distributions.

The tax consequences of taking distributions from your retirement plan can be complex.  Certain distributions can trigger taxable events that could have a major impact on your return.

Typically, individuals with traditional IRA and / or 401(k) accounts can make distributions at the age of 59½ without an associated penalty.  Although an individual can make a penalty free distribution at the age of 59½, the IRS does NOT require an individual to take a distribution until they turn 70½.  The IRS imposes penalties on individuals older than 70½ that do not distribute the minimum required amount by April 1st of the following year. The IRS also imposes a 10% penalty for distributions made earlier than the minimum age of 59½.  The 10% penalty is assessed in addition to the income taxes due on the distributed amount.

Although retirement plans can have complex rules regarding distribution, there are several tax related benefits to having an IRA and / or 401(k) account.  Perhaps the most relevant reason is that these accounts are not subject to the capital gains tax at any point of time.  Additionally, these accounts can be contributed to on a pre-tax basis.  The ability to contribute on a pre-tax basis reduces your current taxable income and allows you to earn interest on the amount of your income that would have been otherwise subject to income taxes.

Individuals generally make distributions when changing employers.  Understanding the applicable tax rules can make for a smooth (tax / penalty free) transition.  In most situations, it is recommended that individuals “rollover” the amounts from a previous employer’s plan into their new employer’s plan. If an individual cashes out on the retirement account they will be subject to substantial penalties and related income taxes, so a rollover is generally a better option. There are also options for individuals that have an employer sponsored employer plan, but have an outstanding loan on their 401(k).  While an outstanding 401(k) adds to the complexity of the scenario, there are measures that can be taken to reduce the impact on the individual.

There are several caveats when it comes to making retirement plan distributions.  Miles Tax & Advisory recommends consulting with a financial expert prior to making any decision.  We are happy to help walkthrough the best approach for you and your specific scenario.  Please feel free to give us a call at 410-685-1406 or by email at info@miles-tax.com.