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Happy Half-Birthday to You!

Happy Half-Birthday to You!

| August 01, 2018
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When our daughters were young, we enjoyed celebrating their “half-birthdays.” We didn’t give any presents, but my wife would make one-half of a birthday cake. Then, our girls would no longer be six, but they would loudly and proudly say “I’m six and a half.” 

Somewhere along the way of growing older, we all stop wanting to be known as 38 and ½ years old. Actually, we also prefer rounding down and want to stay 38 for as long as possible!

When nearing retirement, however, a person needs to start paying attention again to their half birthdays. Through the strange result of political compromise and negotiations, the US tax code has two odd ages to keep in mind: 59 ½ and 70 ½.

For individual retirement accounts (IRA), a 401(k), or a 403(b), you generally must wait until age 59 ½ to withdraw money without a tax penalty. Although certain exceptions exist, you incur a penalty of 10% of the amount withdrawn from your retirement account if you are under age 59 ½. This 10% penalty is in addition to the ordinary income tax you pay on the amount withdrawn.

But when you turn 70 ½, you must begin some amount of withdrawals in that year and each year thereafter. These are called required minimum distributions (RMD). If you do not take out the RMD, you will be hit with a whopping penalty – 50% of what should have been taken out.

Congress did not intend for you to defer taxation forever on these retirement accounts. The institution that is holding your IRA or retirement account usually reminds you of your RMD, but ultimately it is your responsibility to make sure you withdraw your RMD.

When should you withdraw money? Choosing the timing and amount of your withdrawals can be complicated.  It depends on your current lifestyle needs, income tax brackets, and financial goals. We can help you understand how to minimize taxes and penalties while factoring in your goals with creative strategies.

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