Page 29 - Investment Advisor March 2022

For those who have focused on accumulating retirement
savings in traditional IRAs, this means that taxes will be due
on all distributions at the individual’s ordinary income tax rate.
If the taxpayer chooses withholding, they do not have to
determine the proper level of estimated payments, but should
continue to calculate anticipated income each year to avoid
under or over withholding. They can pay throughout the year
or in a lump sum.
Those who convert a traditional IRA to a Roth account are
liable for ordinary income tax on the amount converted.
What strategies should a taxpayer consider
10 when determining the level of distributions
from retirement accounts during retirement?
Two traditional strategies (although there are several) are the
4% rule and the RMD method.
RMDs mean the taxpayer must begin to withdraw funds
from tax-deferred retirement accounts when they reach
age 72.
The minimum amounts that must be withdrawn are
calculated based on life expectancy determined by IRS
actuarial tables.
In the case of a married couple where one spouse is more
than 10 years younger than the other, the joint life expectancy
of the couple is used in the calculation to provide a more real-
istic estimate of the combined expectancy.
3. It is attributable to the individual’s being disabled RMDs are meant to ensure that these tax-deferred funds are
4. It is a “qualified first-time homebuyer distribution,” used for retirement income and not estate planning vehicles.
which is a payment or distribution that is used within 120 The 4%, which has been written about extensively, can
days after the day it was received by to pay for a first-time have unintended consequences. For example, a rigid 4%-per-
home purchase. year requirement tends to encourage taxpayers to seek out
dividend-heavy investments to supplement their otherwise
Are amounts received from IRAs subject fixed income, regardless of whether those investments are oth-
8 to withholding? erwise appropriate. Also, individuals need to be careful when
Yes. If the distribution is in the form of an annuity or similar spending 4% when assets severely underperform.
payments, amounts are withheld as though each distribu- Some advisors find that the RMD method should be con-
tion were a payment of wages pursuant to the recipient’s sidered as a potential alternative to the 4% rule. Instead of
W-4 form. using the 4% calculation, the individual would consult the
In the case of another kind of distribution, a flat 10% must IRS tables to determine applicable percentage, which offers
be withheld by the plan custodian unless a different with- more flexibility.
holding is elected by the owner. Even though distributions Further, it may be, in many ways, more realistic than the
from a traditional IRA may be partly nontaxable because of 4% rule because it bases withdrawals on the current value of
nondeductible contributions, all withdrawn amounts must be the taxpayer’s retirement assets. While this requires deter-
reported to the IRS. mining the account values each year, it also allows taxpayers
Distributions from Roth IRAs are subject to income tax to modify their consumption levels based on actual account
withholding, but only to the extent that it is reasonable to performance. Because the percentages are based on life expec-
believe the amount withdrawn would be includable in income. tancy and vary with age, it is still unlikely that the taxpayer will
outlive his assets.
What should taxpayers consider when
9 determining their withholding for an IRA? This content is based on information from Tax Facts, a resource
Taxpayers with IRAs will face mandatory distributions (or that answers critical tax questions with the latest tax develop-
required minimum distributions) beginning April 1 of the year ments. For more information go to nationalunderwriter.com/
after the year the individual reaches 72 (70 ½ before 2020). tax-facts-web-app.

MARCH 2022 INVESTMENT ADVISOR 27