What El Dorado County area residents need to know about IRA's, 401K's and other Retirement AccountsSubmitted by Cornerstone Financial Group on September 3rd, 2019
What El Dorado County area residents need to know about IRA’s, 401k’s and other Retirement accounts
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at important and relevant financial information!
Once you turn 70 ½, you are required by the IRS to take what are known as, Required Minimum
Distributions. The IRS has other rules regarding another age that is equally important to know
about — age 59½. This is the age individuals must obtain in order to withdraw assets from
traditional IRAs without penalty.
There are a few special conditions that could be met in order to avoid this penalty, but if your
goal is to simply retire before age 59½ and take income from your traditional IRA, you won’t want
to rely on these special conditions. You will want to have a strategic plan in place, and work with
qualified financial and tax professionals before executing any of these strategies.
Here are your best options to avoid the 10% early withdrawal penalty on traditional IRAs.
1. Use non‐IRA money to fund your pre 59½ retirement years.
2. Use the Substantially Equal Period Payments (SEPP) exemption to avoid the penalty, which
requires you to earmark a specific dollar amount of your traditional IRA and take equal payments
from it for 5 years or until you reach age 59½ (whichever happens last). There are different
calculation methods one can use to calculate what these payments will be.
3. Withdraw principal contributions you have made to Roth IRA accounts. One distinct advantage of
the Roth IRA is that you are allowed to withdraw amounts up to your initial contribution amount
without being penalized.
4. Use the age 55 exemption from a qualified plan to avoid the 10% early withdrawal penalty. This
is when you take distributions from a qualified plan (like a 401k) upon separating from service AND
in the year you attain age 55 or older. Be aware:
a. This exemption is available to you in the year you turn 55 (you don’t have to be 55 yet).
b. The separation from service (retirement) must have taken place in the year you turn 55 (or any
year thereafter). Translation: If you retire at age 53, this exemption won’t work.
c. The distributions you plan to take must stay in the qualified plan with your employer (you can
roll over assets that you don’t plan to need until after age 59½ into an IRA, but be sure to keep
the amount you want for income until then in your qualified plan).
d. The age 55 exemption is modified down to age 50 for qualifying individuals of certain
professions, including first‐responders, primarily police officers and firefighters.
Evaluate the Best Time to Take Your First RMD (Required Minimum Distribution)
The IRS has a rule regarding tax‐deferred retirement accounts (like IRAs) that dictates when (and
how much) you need to start withdrawing money. The reasoning is simple – they can’t let you enjoy a
front‐end tax deduction, along with tax deferral, without getting paid their “share” of the pie
eventually. We all know Uncle Sam has bills to pay of his own. Oddly enough, the rule states that your first distribution is required to take place by April 1st
of the year following the year you turn age 70½. (Bizarre, I know.). If you were to have turned 70½
on May 15, 2019, you could have chosen to take your first RMD during the tax year 2019 OR wait
until any time in the 1st quarter of tax year 2020 (before April 1st).
If you choose to wait, the income will count toward your taxable income in 2020. However, all
future RMDs must be taken in the tax year in which they are required. In this example, you would
have another RMD that would need to be taken out in 2021.
So, what is the best decision?
This depends on your situation. Let’s explore a few possible scenarios:
‐ If taking the distribution in 2019 would trigger an increase in your Social Security benefits
being taxed, maybe it is best to wait until 2020 for the first distribution.
‐ If you expect your income to be considerably higher in 2020 for some reason (thus bumping you up
a tax bracket), it may be best to take the first distribution in 2019.
‐ If you expect tax rules to change for your benefit in 2020, then you may wish to delay the first
The short answer is that your first RMD gives you an opportunity to do a little tax planning.
Evaluate the Best Time to Take Future RMDs (Required Minimum Distribution)
The penalty for failing to take a required minimum distribution is 50% of the entire distribution.
It’s a hefty penalty, so be sure to pay close attention to this rule.
However, there is nothing in the rules that would prohibit you from being strategic as to when
during the year you should take the distribution.
For many, they take IRA distributions in order to satisfy monthly income needs. If this is your
situation, there is no need to get cute with trying to time the distributions.
The IRS has a rule regarding tax‐deferred retirement accounts (like IRAs) that dictates when you
need to start withdrawing money (the rule also dictates how much you need to take, expressed as a
percentage). If you are fortunate enough to be in the financial position to have flexibility during
the year on when to take your distribution, then you might want to choose to be strategic about the
If we look at the annual calendar returns (January–December) of the S&P 500 Index from 1926– 2018,
we will find that 68 of the 93 years were positive returns. This means that 67.8% of the time, this
index yielded a positive return when the clock struck midnight on December 31.
That’s approximately 3 out of every 4 years. What does this tell us about when to take our RMDs?
Basic math would suggest that you wait until the end of the year. This allows the money more time
in the market, especially if your intentions are to “spend” your distribution once you take it.
Other factors to consider may be to take the distribution in chunks after an asset class has
performed well during the year. Alternatively, if you plan to consider tips #4 and #5 from earlier,
you may want to take the RMD early in the year so there is more time for tax‐free growth in the
Roth. Tip #4 would suggest you evaluate the impact of the conversion and consider a
re-characterization the following year if it made financial sense.
Finding a Use for Unneeded Required Minimum Distributions (RMDs)
This strategy is used by individuals who are over age 70½ and don’t “need” their required minimum
distributions (RMD) from their traditional IRA(s).
Let’s assume your RMD is $20,000. You could choose to take the distribution and have 100% taxes withheld (meaning you wouldn’t physically receive any money). If you are in the 25% tax bracket, you could convert $60,000 to a Roth IRA. Your RMD with taxes withheld would cover the tax
on the conversion.
From a future planning perspective, you would have accomplished two things:
1. Allocated money to a tax‐free growth and distribution account.
2. Potentially reduced the amount that would be required to withdraw from your traditional IRA in
future years since you shifted $60,000 away from being included in the RMD calculation.
One last important note this month regarding IRA’s.
The beneficiary election form for a 401(k), 403(b), an IRA, and other qualified retirement accounts
is an area where many mistakes are made. In many cases, this form is given very little attention.
Yet, how the form is completed could have unintended consequences.
Many people wrongly assume that a will or a trust would supersede a beneficiary election form when
it comes to a retirement account. The reality is that this form will be the driving guidance given
when it comes to determining who will receive your retirement accounts and how tax efficiently they
will receive them.
Brought to you by Craig Watkins, Managing Partner, Cornerstone Financial Group. If you would like
more information regarding your IRA accounts or other retirement concerns, please email Craig at,
Craig J. Watkins is an investment advisor representative of, and advisory services are offered through, USA Financial Securities Corp. Member FIRA/SIPC. A Registered Investment Advisor located at 6020 E. Fulton St., Ada, MI 49301. Cornerstone Financial Group is not affiliated with USA Financial Securities, CA License #0591010