Huge Tax Risks When Taking Money
Out of Your IRA/401(k)
|
|
401(k) retirement accounts offer upfront tax savings. Any money that you contribute to a 401(k) is deposited on a pre-tax basis, which can help lower your tax bill during your working years when your income is typically higher. A lot of times, when you retire, the account is rolled over into an IRA; however, that account is still taxable when you withdraw money from it. If you have not taken enough money from the account by the time you reach age 70 1/2, the government forces you to start taking a calculated amount on an annual basis, which is taxed as ordinary income. These mandatory withdrawals are called required minimum distributions (RMD).
However, sometimes it makes sense to take a substantial amount of money out of the 401(k) or IRA above the RMD, or even to cash out the entire 401(k) or IRA. But you have to be very careful and have your eyes wide open on the tax consequences! Withdrawals work very differently from contributions. Once you start withdrawing from your 401(k) or IRA (unless it is a Roth IRA), your withdrawals are taxed as ordinary income. That means your withdrawals are taxed at the same rate as other sources of income, such as your employment income, interest on accounts, pension, etc.
Most retirees live on less in retirement than they did in their working years. However, you need to account for taxes prior to deciding how much to withdraw if you are taking more than the RMD - and especially when debating about cashing out these types of accounts. A withdrawal adds to your income base, which means you could end up jumping tax brackets and paying a lot more in taxes!
How taxes due on an IRA or 401(k) impact the total amount you receive
Depending on your tax bracket, you could end up losing a substantial amount of your assets just in order to pay all the taxes due when you withdraw large amounts from an IRA or 401(k). Under the new tax plan initiated in 2018, there are seven tax brackets (see the chart below).
Here’s how it works: If you withdraw $30,000 from your 401(k) or IRA, and you have no other income for the year, you would fall into the 12% tax bracket (meaning you’d have less than the original $30,000 after taxes). You could either request to deduct the 12% from the $30,000 to pay the taxes at the time of the withdraw, or you could defer paying the taxes in some circumstances until your income taxes were due for that fiscal year (April 15
th
following the distribution from the retirement account).
401(k) and Traditional IRA withdrawals are taxed like ordinary income
For the 2019 tax year, the tax brackets did not change from last year - but they are inflation-adjusted. This just means all of the income thresholds have increased a little bit from 2018.
|
|
SO...What is taxable income?
First, your income from all sources is added together. This is known as your gross income.
Next, certain adjustments to your gross income can be applied. Available adjustments to income for 2018 and 2019 include contributions to qualified retirement accounts, up to $2,500 in student loan interest, and educator classroom expenses up to $250, to name a few of the most common. This produces your adjusted gross income, or AGI. From your AGI, your applicable tax deductions are applied to calculate your taxable income. Taxpayers can either use the standard deduction or itemize their deductible expenses for the year - whichever is more beneficial to them. The taxable income figure that is left after accounting for deductions is the number that is applied to the tax brackets to determine what percentage of taxes you will have to pay.
You should note that a few types of income, like qualified dividends and long-term capital gains, are taxed according to different rates. I always recommend consulting a CPA (not just an accountant) to get the best tax advice. This is advice I have lived by since I started working at age 16!!! No one wants to pay more taxes than they have to, which is why this is so very important. If you mess this up, you cannot go back; the penalties are steep!
|
|
Celebrating Life with Shayla
|
|
Managing Partner Stacey Walters was blessed with a beautiful angel for 10 years. Her daughter Shayla, who was born with a heart defect, unexpectedly suffered a cardiac arrest at 5 months old, leaving her severely disabled. In April 2018, Shayla unexpectedly gained her angel wings and left Stacey and her family on this earth. While Shayla forever changed their family’s life, she taught Stacey the meaning of selfless love and that we are never promised tomorrow.
Shayla’s story forms the pillar of our law practice: We are all going to leave this earth, but if we aren't prepared for the unexpected, the people we hurt the most are the ones we love the most! It is too important not to have a plan in place, and everyone needs an estate plan for that unexpected time, but not just any plan –
the perfect plan that easily ensures your final wishes are met while relieving the stress and burden on your family when you are gone!
At Thomas Walters Probate and Estate Planning Attorneys, we build lifetime relationships with our family of clients. We not only help ensure our clients have a current and perfect plan in place, but we give them peace of mind knowing both they and their family can always call on us a trusted advisor when the unexpected happens.
|
|
Upcoming Estate Planning Events
|
|
Register today! 800-769-1561
|
|
Apex
May 15, Wednesday – Peak City Grill @ 6:30 PM
126 N Salem Street
Apex, NC 27502
|
|
Burlington
May 23, Thursday – Cutting Board @ 6:30 PM
2699 Ramada Road
Burlington, NC 27215
|
|
Cary
May 16, Thursday – Lugano @ 5:30 PM
1060 Darrington Drive
Cary, NC 27513
|
|
Charlotte
May 7, Tuesday – Vine American Kitchen @ 6:30 PM
13735 Conlan Circle
Charlotte, NC 28277
|
|
Huntersville
May 15, Wednesday – Red Rocks @ 6:30 PM
8712 Lindholm Drive
Huntersville, NC 28078
|
|
"Your attorneys are very professional and knowledgeable people who have been very helpful."
-Mr. Pascucci, Cornelius, NC
|
|
Chapel Hill
1777 Fordham Blvd.
Suite 101
Chapel Hill, NC 27514
|
|
Charlotte- North
*
ExecuBusiness Center
10130 Mallard Creek Rd.
Ste. 300
Charlotte, NC 28262
|
|
Charlotte- South
Ballantyne Business Center
13850 Ballantyne Corporate Pl. Suite 500
Charlotte, NC 28277
|
|
Greensboro
*
Byron Offices Suites
7-B Corporate Center Dr.
Greensboro, NC 27408
|
|
Raleigh- Main
Access Office Business Center
8801 Fast Park Dr.
Ste. 301
Raleigh, NC 27617
|
|
S. Raleigh Cary
4904 Waters Edge Dr.
Ste. 260
Raleigh, NC 27606
|
|
The Pinehurst/West End
5228 NC-211 D
West End, NC 27376
|
|
|
|
|
|
|