Retirement planning is a vital part of financial health. Many people use a Traditional IRA to help ensure a comfortable retirement (you can help your household employee too). Building an IRA during your working life is only half the consideration; you should plan for distributions as well.
It literally pays to know the finer points of IRA distribution. If planned for correctly you can limit taxes and potentially avoid fees. It is a best practice to have a trusted financial adviser to guide you through all of this but here are some things to initially think about concerning IRA distribution.
- Early Distributions – Sometimes you need to take distributions before the age of 59.5. This generally means the distribution is taxed and subject to a 10% penalty. Depending on how the contribution was made you could have some room to take a distribution tax free. You can also avoid the penalty if the distributions are to be used for medical expenses, buying a home, or educational expenses. There are limits to what can be distributed for these purposes penalty free.
- Beneficiaries – Naming beneficiaries not only affects who receives the balance after you pass but it plays a part in how and when you have to take distributions. This also gives you a chance to identify how the benefits should be paid out. It is a good idea to review your beneficiaries periodically. Things like changes in your finances or family are good times to look back at how you set things up. This is also an important step in overall estate planning.
- Required Distributions – At age 70.5 you must begin taking distributions from your IRA whether you have retired or not. If you don’t take the minimum annual distribution you could face a 50% penalty tax on the amount that should have been taken but wasn’t. Ideally you want to keep the tax haven of the IRA going as long as possible for you and your beneficiaries.
It is never too early to start planning! Keep in mind that there are other retirement savings options as well and that a mix of products is often the best bet. If you haven’t started planning (or saving) for retirement, your first step should be finding a financial adviser you trust.