Make the Most of Your IRA Withdrawals

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You have reached age 70½ and its time to start your IRA withdrawals.  Fortunately, you are financially comfortable and have no need to withdraw the money. You would rather leave the account be and continue the tax-deferred growth.  Unfortunately, you have no choice but to begin your IRA withdrawals or face a very hefty IRA penalty of 50% of the amount you should withdrawal.

IRS wants to collect the IRA tax they have allowed you to defer for many years so just bite the bullet. The specific amount of the IRA withdrawal is figured according to an IRS formula that factors your account balance as of the previous December 31, your age and your life expectancy.  You'll likely be notified of the exact amount of your minimum IRA withdrawal by your account provider.  However, you can learn about doing the IRA minimum distribution calculation yourself as you may have more than one IRA account and may desire to allocate your withdrawal disproportionately.

What is the best action if you don't actually need the money from your IRA withdrawal?  Here are some options:

1.    Benefit your heirs—buy life insurance.  Leaving your heirs money in an IRA is about the worst kind of money to leave them.  For every dollar, they will only get about 70 cents (because of the income tax they will owe.  They may even get less if your status subject to estate taxes which the beneficiaries will also pay .  If however you take your IRA withdrawals and use that money as the premium for a life insurance policy, the benefits of the life policy are received by your heirs income tax-free and if properly structured, estate tax free. Additionally, each dollar placed into a life policy will often payoff $2-$4 to the beneficiary.

2.    Give the money to charity. Because of the special temporary benefit in the tax law, money given to charity directly from an IRA account becomes a very beneficial way to make charitable gifts. Because the IRA withdrawal, when given to charity does not get added to your taxable income, it often helps in minimizing the tax on your Social Security income, prevents an increase your Medicare Part B premiums and leaves your itemized medical deduction unaffected. Many parts of your finances that comprise your taxable income are based on your total income and therefore, anything you can do to keep your income down is beneficial. Making charitable gifts directly from your IRA is such an action.

3.    Gift your IRA withdrawal to a grandchild. Have them use part or all of the money to start funding their own IRA. In that way, your good fortune becomes a catalyst for good money habits by your IRA beneficiaries. You can gift up to $13,000 annually per donee without any adverse tax consequences. So rather than give heirs cash, give them an IRA that will benefit their future.

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