By Barry Zimmer on June 4th, 2020 in Elder Law
As estate planning and elder law attorneys, we are often asked questions about individual retirement accounts. One of them revolves around the matter of taxation.
There are traditional individual retirement accounts, and Roth IRAs. If you were to contribute assets into a traditional IRA, the contributions would be made before you pay taxes on the income.
As a result, when you start to take distributions, they would be taxed at your regular income tax rate. You are allowed to start to accept distributions without being penalized when you are 59 ½ years of age.
This being stated, there are some exceptions to the age rule. People are allowed to take penalty-free withdrawals to pay medical bills. You can use some of the money in your account to help you buy your first home without being penalized. College tuition can also be paid in a penalty-free manner.
You would be required to pay taxes on distributions, because the contributions into the account were made before taxes were paid.
Things work in the reverse manner with a Roth IRA. Deposits are placed into the account after taxes, so distributions from the account would not be subject to taxation.
You have to start to take mandatory minimum distributions at the age of 72 if you have a traditional account. A Roth account holder is never required to take money out of the account.
Beneficiaries of IRAs
The tax arrangement is the same for beneficiaries of IRAs. Roth beneficiaries pay no taxes on distributions, but traditional beneficiary payouts are taxable.
Some of the rules that govern these accounts were changed at the end of last year when the SECURE Act was enacted. In the past, beneficiaries had to take required minimum annual distributions, but they could stretch them out for an open-ended period of time.
Now, beneficiaries of both types of accounts must clear them out within ten years, and mandatory minimum distributions are still required.
Maximizing Your Social Security Benefit
Social Security is a big piece to the elder planning puzzle. You should definitely understand the possibilities thoroughly so that you can make the right choices.
First, if you have not already done so, you can register your account on the Social Security website. This will give you the ability to see how much you can expect to receive when you become eligible.
Full retirement age varies depending on the year during which you were born. If you were born between 1943 and 1954, you become eligible for your full Social Security benefit when you reach the age of 66.
The full retirement age then graduates by two months per year. So if you were born in 1955, your full retirement age is 66 years and two months, and if you were born the following year, your full retirement age is 66 years and four months.
It continues to rise in this manner until 1960. People born in 1960 and later reach full retirement age on their 67th birthdays.
However, you don’t have to apply for Social Security when you reach your full retirement age. You can continue working and receive delayed retirement credits which will increase the amount of your benefit by 8 percent per year until you reach the age of 70.
Plus, the amount of Social Security that you receive is calculated based on your 35 highest earning years. As a result, these final three years of working past your full retirement age could replace three years during which you earned less earlier in your career. This would provide an additional boost to your monthly benefits.
You could choose to go in the opposite direction. It is possible to accept a reduced benefit when you are as young as 62. The amount of the reduction would be between 25 and 30 percent depending of the year of your birth.
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