Before taking a distribution from a tax-deferred account such as a Traditional or Roth IRA, think about the following. First, a Traditional (“deductible”) IRA distribution is typically taxed as ordinary income. Keep in mind, distributions to shareholders younger than 59½ may also be subject to a 10% IRS penalty unless an exception applies. Second, a Roth distribution is tax-free if you have met the necessary requirements like owning the account for five or more years and being 59½ or older. It is important to note that if you take money from a regular (taxable) non-retirement account, such as a single or joint account, you may be subject to capital gains tax.
Here is an example. Let’s say you need $3,000 to take a vacation. If you withdraw the money from a Traditional IRA and are in a 25% tax bracket, you would incur $750 in federal taxes. However, a Roth distribution could be tax-free. Meanwhile, a taxable single or joint account may be subject to capital gains tax on proceeds above your original cost at rates ranging from 0% to a maximum of 20% for long-term gains. Each scenario has different tax ramifications and your decision should be based upon your situation at any given time.
Due to the complex IRA distribution rules, one size does not fit all so speak with an investment professional and discuss what might be right for you. As always, I recommend including your accountant or tax preparer in the decision before you make a transaction.
The writer is a Retirement Plans Specialist at Fenimore Asset Management headquartered in Cobleskill, NY with a branch office in Albany.
Fenimore Asset Management is an independent investment advisory firm located in Cobleskill, NY since 1974. Fenimore’s affiliates are the Fenimore Private Client Group & FAM Funds – offering separately managed accounts and mutual funds. In-depth research. Insightful investing.
