Accessing Your Retirement Funds

As 80 million baby boomers approach retirement, the need for planning for distribution of their nest eggs (that is, accessing and drawing on their savings) grows by the day.  The good news is that this is occurring at a time when one of the largest tax breaks in history is being made available to the American public.

The bad news is that Congress has nicely gift-wrapped it for you in one of the most complex rules ever written: Internal Revenue Code 590.

At Presidential Brokerage, our goal is to be a leading source of retirement distribution planning advice. We believe it is one of the most fundamental aspects of retirement and estate planning for those heading into retirement, and also one of the most misunderstood topics in the financial services, legal, and accounting arenas.

We want you to be aware of the crucial planning issues that most Americans face. One of the primary issues is simply a lack of industry knowledge regarding the many aspects of distribution planning. It is estimated that well over 90% of financial advisors have no training or perspective on its importance.

Put simply, it is about using – and eventually passing on – your money in the most tax efficient manner possible.  Disinheriting the IRS from "partnering" with you in what may be your largest asset could be one of the shrewdest financial moves you ever made. Think of it this way:  what good is a 10%, 20% or even 30% return on your investments if you are going to give 80% of it back to Uncle Sam?

The plans mentioned below are considered retirement funds, and are distributed according to what is commonly referred to as the “IRA distribution rules”. Again, among the most complicated rules in the entire U.S. tax code.

Traditional IRAs

The traditional IRA – which stands for Individual Retirement Arrangement and named after an IRS pension specialist, Ira Cohen, who helped create it – is a “plain vanilla” retirement arrangement which has been around since 1975. The contributions to a traditional IRA can be tax-deductible or not, depending upon your level of income and whether you are active in a company plan. You cannot contribute to an IRA after you reach 70½, and you cannot withdraw from an IRA before you reach 59 ½ (but there are exceptions) and you must begin taking required minimum distributions out of your IRA when you reach 70 ½.

The Roth IRA

The Roth IRA came into existence in 1998 and was named after Senate Finance Committee Chairman William Roth from Delaware. Contributions to a Roth IRA are not tax-deductible but, unlike a traditional IRA, distributions and the growth of the IRA are completely tax-free- as long as you play by the rules. Contributions to a Roth IRA can be made annually or by converting a traditional IRA to a Roth IRA. When you convert, you would pay tax on the funds that were converted. Unlike the traditional IRA, you never have to withdraw from a Roth, and if you qualify, you can keep contributing after you reach 70½ or beyond.

Qualified Plans vs. Nonqualified Plans

In order for an employee retirement plan to be "qualified," the benefits have to be offered to all eligible employees, not just a chosen few. Qualified plans provide tax advantages not available to nonqualified plans. The major advantages are current tax deductions for employers  who contribute to such a plan for their employees, and the fact that employees pay no immediate tax on their contributions. Examples of qualified plans are a company 401K, and other profit sharing plans, defined benefit plans, defined contribution plans, and Keogh plans.

The Roth 401K

A Roth is a company sponsored retirement plan that became available in 2006 and is still relatively new. To contribute to a Roth 401K, employers must offer the plan as an addition to their traditional 401K plan. They do not have to offer the Roth 401k plan, but more companies are. Contributions are from after tax funds.

The Roth 403(b) is similar in concept, except that like traditional 403(b) tax deferred annuity plans it is offered by schools, universities, hospitals, and other public institutions, not companies. Contributions are from after tax funds.

The 457 plan is a type of non-qualified, tax advantaged deferred compensation retirement plan that is available for state and local governmental employees as well as employees of tax-exempt organizations. Many distribution rules that apply to other plans do not apply to 457s.

Retirement Documents
Avoiding the tax trap
Choosing your IRA

Notice: Presidential Brokerage, Inc., does not provide tax, legal, or accounting advice. Please consult the appropriate expert for guidance in these areas.