You have been building your nest egg for the past several decades; not having an “exit strategy” could lead Uncle Sam to take a hefty chunk out of that retirement pot. Here are some trouble spots to keep in mind when developing a withdrawal strategy from individual retirement accounts (IRAs) to protect the assets you have accumulated.
The once-per-year rollover rule
Effective January 1, 2015, only one indirect rollover (known as a 60-day rollover) per year is permitted for all of your IRAs. Doing more than one indirect rollover counts as an excess contribution and is subject to a 6% penalty (401(k) plan-to-IRA rollovers and Roth conversions don’t count). Instead, you should use direct rollovers – or, trustee-to-trustee transfers – because they are unlimited.
Inherited IRAs – spousal beneficiaries
The #1 mistake made by spousal beneficiaries is improperly choosing between remaining a beneficiary or doing a spousal rollover into the surviving spouse’s IRA. Setting up an inherited IRA is the right move for spouses under 59½ years old – if a withdrawal is needed, a 10% early withdrawal penalty would not apply, as it would with a rollover. However, a spousal rollover makes sense if the surviving spouse is older than 59½. A spousal rollover can be done anytime, so money can eventually be rolled over after the spouse hits 59½ anyway.
Inherited IRAs – non-spousal beneficiaries
Non-spousal beneficiaries, such as children and grandchildren, cannot do a 60-day rollover from an inherited IRA into their own IRA. You should make sure the money stays in the inherited account, because it is a taxable event that cannot be reversed if rolled over. The beneficiary takes the required minimum distributions (RMDs) each year, and any excess withdrawn is taxable (unless in a Roth account).
Inherited Roth IRA RMDs
Even though investors are typically exempt from taking RMDs from Roth IRAs, they need to take RMDs if the Roth account is inherited. Otherwise, they are subject to the same 50% IRA penalty for not taking the RMD. Inherited Roth RMDs are not taxable to the beneficiary.
RMDs from IRAs can be aggregated with all other IRAs, meaning your RMDs can be taken from a combination of accounts (with the exception of inherited or Roth IRAs). However, you cannot satisfy an IRA RMD from a 401(k) plan. RMDs for inherited IRAs can only be aggregated if inherited from the same decedent, and husband and wife RMDs cannot be aggregated.