IRA withdrawal and IRS penalties or interest?

[w887793m]

Hi there,  I just turned 59 and a half and am looking at moves with my IRAs ahead of any huge RMDs later.  If I take out $28k or so (keeps me JUST below a tax rate increase) this tax season, will the IRS hit me with penalties and or interest on that money or will i just have to pay the taxes alone on the distribution?   Whole lotta new issues to deal with following the SECURE act changes!  Thanks for your help,  Wes

[GailL1]

@w887793m 

I don't see anything in the SECURE ACT that would affect you in this transaction.

As long as you are 59 1/2 you will avoid the early withdrawal penalty.  You will pay your oridinary income taxes on whatever amount you withdraw .

If you don't need the money and just want to avoid any tax increases that maybe coming down the line   😧  - have you thought about doing a ROTH CONVERSIONS from monies currently in your IRA?  IRS - IRA FAQs - Rollovers and Roth Conversions 

[w887793m]

Thanks for the reply.  Yeah, I'm just trying to build up a tolerance to writing big tax checks for the foreseeable future and trying to figure out if I had a penalty in store for somehow under paying ahead of time. I'm still working, so I don't think I have that issue yet.  I'm going to start doing the Conversion thing,  preferably during a dip in the market. My previous plan for my kid's legacy was sunk with the secure act, so maybe I will start funding Roth IRAs for them for now.  

[GailL1]

Yeah, I know - we just don't want them to change the law so that they count both IRA & ROTH IRA amounts when determining the RMD from the IRA account - that came up before under the Obama Administration.

Just stay informed - I think more might be coming in the next few years.

Yes, the ROTHs are much more attractive today because of the inherited IRA  changes in the SECURE ACT.

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Bank Rate - 07/21/2020 - Roth IRA conversions are more attractive than ever thanks to the SECURE Act 

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[NOTHAPPENING]

I think I remember about inherited (except for spouses) Roth IRA being liquidated in exactly 10 years (of course without taxes).

[GailL1]

I hope everybody involved understands that the SECURE ACT signed into law in 12/2019 did change NON-Spousal beneficiary's distributions of (Inherited) Traditional IRA accounts to having to draw them down over a 10 year period rather than a lifetime; boosting their tax consequences.  With that change, the conversion to a ROTH by the owner was made even more appealing.

However, SECURE ACT 2.0 (not yet introduced into the current 117th Congress) but was introduced in the 116th (October 2020) is still being considered by the current House (Ways and Means) and if perchance it does pass could make further changes especially to the passing of ROTH IRA accounts to NON-Spousal beneficiaries.

No need to now be overly concerned, ROTH holders in this situation - but pay attention !!  

PLEASE keep the discussion on the issue and not politics !!

[Gorm50]

There are many a horror story of people who converted their Trad to ROTH only to suffer a correction and wish they had waited for a more opportune time to convert as their tax liability was greater than what it could have been.  Should Congress, in any way renege on the TAX FREE status of already taxed Roths there will be a bunch of ticked off Americans.  

[GailL1]

@Gorm50 

Oh, I don't think they will renege on the earnings being tax-free to the owner of ROTH IRA's but like we have discussed, the attractiveness of it being passed along to a NON-spousal beneficiary will probably lessen just like the SECURE ACT of 2019 did to NON-spousal beneficiaries of Traditional IRAs.

They are Retirement Accounts - no matter the name, not a vehicle to pass along wealth to someone who is not a spouse but up til now has been a good vehicle for that passing along.

See,in my case, right now it is me, and me alone (no spouse)- I try to keep up with any changes so I can determine out of which type of account(s) I should use, if the need arises.  HAVE to take RMD - that's a given or get more and convert what is over the RMD to ROTH - but IF the non-spousal beneficiary rules change for a ROTH - I might just decide to eliminate the ROTH so I can pass it without any legislative distribution timeline for those NON-spousal beneficiaries. 

Does that make sense?

[Gorm50]

I suspect most moved to Roth to advantage their heirs, NOT themselves.  Personally, I see Congress cherrypicking those with wealth as they dare not mess with mass America.  Too many Americans have IRA wealth and were NOT happy with Secure Act.  The cowards way out is to just keep printing as they have been.  

Government is getting increasingly invasive.  On this year's tax return, they wanted to know if I bought bitcoin. 

If they eliminate a means to pass wealth to children I can only imagine many resorting to buy metals, collectibles, etc  so as to avoid the tax bite.

I, too, play "what if" games with RMDs to minimize my tax bite. 

God knows I did not deny myself consumption to benefit Uncle Sam, who wastes $$$.  

[Gorm50]

Wow, Gail, I know you do your research but I have NEVER READ where BOTH Traditional and ROTH must be considered when calculating an RMD.  Personally, that makes NO SENSE as ROTH are TAX EXEMPT and Traditional TAX DEFERRED. 

Can say the IRS has NOT challenged my tax returns and I have NEVER used BOTH to calc my RMD. 

Updated. Checked out TDAmeritrade and ROTH IRAs are exempt from RMD calcs but 401k, 403 and 457 ARE included in the RMD calc.   

[GailL1]

@Gorm50 

Sorry that you seemed to have misunderstood my statement - it is NOT what happened, it is what was proposed.  Thank Goodness, it did not progress to a tax change.  I don't think the purpose was so much any taxation but that the ROTH account(s) begin to be reduced with distributions thus limiting the amount of tax-free gain over a lifetime.

My statement said "we just don't want them to change the law so that they count both IRA & ROTH IRA amounts when determining the RMD from the IRA account - that came up before under the Obama Administration." 

No, it didn't get any headwind when it was proposed under the Obama Budget proposals.  Think it was 2015 .  But several of the proposals made back then are also being considered now - so it is best to keep abreast of any changes which are being proposed.

Plus, I am old, and don't remember quite so well - this is what I am referring to in my statement:

This is a 2015 (for TY2016 )budget proposal tax changes which I am referring to - most of the changes, if any, did NOT get approved.

Back then, they called this the "Treasury Greenbook" - as I understand it, an analysis by Treasury on budget proposal on how to increase revenues.

US Treasury: Feb. 2015 General Explanationsof the Administration’s Fiscal Year 2016 Revenue Proposal... Start on PAGE 143 of the actual report under the heading of:  SIMPLIFY MINIMUM REQUIRED DISTRIBUTION (MRD) RULES

specifically under the PROPOSALS - (page 144)  at the end reads as:

The proposal would also harmonize the application of the MRD requirements for holders of designated Roth accounts and of Roth IRAs by generally treating Roth IRAs in the same manner as all other tax-favored retirement accounts, i.e., requiring distributions to begin shortly after age 70½, without regard to whether amounts are held in designated Roth accounts or in Roth IRAs. In addition, individuals would not be permitted to make additional contributions to Roth IRAs after they reach age 70½. The proposal would be effective for taxpayers attaining age 70½ on or after December 31, 2015 and for taxpayers who die on or after December 31, 2015 before attaining age 70½.