When retired, it’s important to handle your pension and IRA withdrawals wisely. Keep this guideline in mind: if the money that went into your retirement plan was not taxed during deposit, it will be taxable when you withdraw it. Plan accordingly.
Employer contributions to a pension plan are frequently made with pre-tax money, so those portions will be taxed upon withdrawal. To complicate matters, your own contributions to the same plan may have been made with after-tax dollars and so would not be subject to taxation upon withdrawal. While the IRS supplies worksheets in their tax instructions, determining your taxable and tax-free distributions can be extremely complex. For additional information, see IRS Publication 575, Pension and Annuity Income,
You most likely took tax deductions for contributions you made to your traditional IRA in prior tax years. As a result, the money is taxable when you withdraw it. There are also required minimum distributions from qualified accounts after age 70-1/2 – which means you’ll be required to pay taxes on that money never taxed, as you take it out. Determining your required minimum distribution is a key aspect of retirement planning. AARP offers a free online calculator, but it’s always a good idea to consult an elder law attorney or tax professional to determine your best course of action. Failure to take required minimum distributions will cause a large penalty, besides the tax due.
Contributions you make to a Roth IRA account are always made with after-tax dollars. Therefore, qualified distributions will be tax-free. A non-qualified distribution is subject to taxation of earnings and a 10% additional tax, unless an exception applies. For more about the rules affecting Roth IRA withdrawals visit https://www.rothira.com/roth-ira-withdrawal-rules.
Don’t Guess About Your Retirement Fund Withdrawal
Before withdrawing any funds from any retirement account, consult with an elder law attorney or your tax professional to understand potential tax consequences.