Monday, November 1, 2010

Larger Withdrawals From IRAs in 2010 May Help Savers With Taxes

By Danielle Kucera - Oct 20, 2010 11:01 PM CT
For U.S. taxpayers making mandatory withdrawals from an individual retirement account, 2010 may be a good year to take out more than necessary because tax rates may rise. …
Savers who may be in a higher tax bracket next year should consider withdrawing more than the minimum in 2010, said Mark Nash, a partner in the Dallas office of the New York-based Private Company Services practice of accounting and advisory firm PwC. Required withdrawals are based on a formula of the account balance and the individual’s age.
“Pulling out a large sum in 2010 would lessen the 2011 amount, and make that year’s distribution lower,” said Nash, who advises high net-worth investors. …
The U.S. government suspended required minimum distributions for tax year 2009 in response to plummeting account balances after the Standard & Poor’s 500 Index dropped 38 percent in 2008. Mandatory distributions returned in 2010 as the economy strengthened and the S&P 500 rose 23 percent in 2009. Roth IRAs, which are funded with post-tax dollars, are exempt from minimum withdrawal rules while the owner is alive.

Rising Rates

President Barack Obama has proposed allowing the top two marginal income tax rates to rise to 39.6 percent and 36 percent from 35 percent and 33 percent for individuals earning more than $200,000 and couples making more than $250,000. Congress is scheduled to take up taxes when it returns from recess in November.
“This uncertainty doesn’t mean that people shouldn’t be sitting down and doing their planning now,” said Greg Rosica, a tax partner at consulting firm Ernst & Young LLP in Tampa, Florida, and contributing author to the Ernst & Young Tax Guide.
Someone who may be in a lower tax bracket in 2010 because of large deductions or less income should also consider taking a bigger distribution this year to take advantage of lower rates, said Rebecca Pavese, an accountant at Palisades Hudson Financial Group’s national tax practice in Atlanta.

Combine Withdrawals

Taxpayers who aren’t already taxed at top rates should make sure taking a bigger distribution won’t tip them into a higher bracket, said Bill Fleming, a managing director in the Hartford, Connecticut, office of PwC. …
Those who pay estimated taxes during the year can request the account administrator to withhold money from their RMDs and pay income tax just once at the year’s end, said Rosica of Ernst & Young. That way they can hold onto their money longer and invest it without paying a penalty for underpayment, Pavese said.
The law assumes that payments are made equally throughout the year unless the taxpayer states otherwise, according to the IRS.

Charity Deduction

… Any IRA account holder can give all or part of a distribution to charity and take a deduction for the donation, said Debbie Cox, a Dallas, Texas-based wealth adviser for J.P. Morgan Private Bank, which is based in New York. A provision that allowed taxpayers to roll over a distribution directly to a charity and avoid income tax expired at the end of 2009, she said.
IRA holders should also try to take their required withdrawals at roughly the same time every year to avoid mistakes or forgetting about it, Fleming, of PwC, said.
To contact the reporter on this story: Danielle Kucera in New York at
To contact the editor responsible for this story: Rick Levinson at
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