Tax-Deferred Savings Plan

  

Categories: Tax, Retirement

See: Tax-Deferred. See: 401(k) Plan. See: IRA.

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Finance: What are IRA distributions, and...1 Views

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Finance allah shmoop what are ira distributions and well how

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do they work Well the big idea here iras or

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individual retirement accounts are not tax free Yeah you do

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pay tax but only when you withdraw the money out

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of the ira Ok so backing up b b pete

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you make eighty grand a year is a union told

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booth worker in california taking five dollar bills from drivers

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and putting them in the little slot thing here Brutal

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rigorous highly stressful job Yes you have a pension that

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the government you work for contributes taxpayer dollars to pay

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for You also have an ira and you contribute five

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grand a year to that ira Well that five grand

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comes out of the eighty grand you'd normally be fully

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taxed on But instead of the eighty grand that the

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irs would normally worry about well as faras they're concerned

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this year you didn't make eighty grand You made seventy

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five grand Why Because you contributed voluntarily five grand to

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your ira and it'll sit in that separate special account

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likely invested in the stock market so that it compounds

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away doubling about every six seven eight nine years until

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you retire with five grand contributions year after year after

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year you'll have a full million bucks in there By

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the time you retire at sixty five and maybe a

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little more maybe it'll left and you'll have the option

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to start withdrawing from the ira at that point Or

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you can wait to start withdrawing the money until you've

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hit the maximum age of seventy and a half at

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which point the law makes you start to withdraw the

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money And there's a whole schedule on when you can

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withdraw it how you can withdraw and all that Anyway

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That withdrawal process is kind of a big deal because

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small tweaks in it make a huge difference Like if

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you had saved money beyond the ira i e Your

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personal savings accounts and could live on that another five

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and a half years Well then if the market followed

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historical patterns instead of beginning your ira withdrawals from a

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base of a million dollars in there While you have

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compounded that million bucks another five and a half years

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worth it so that it was then worth maybe a

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million six or a million seven by the the time

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you were seventeen and a half That's an extra six

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or seven hundred grand there that would happen just for

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you being ableto wait to start withdrawing Well why is

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there a must in there like the government needs to

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tax you somehow right So that's why you must start

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withdrawing it at some point And remember that money went

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into the ira and sat there compounding tax free for

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decades But now when you take it out you'll pay

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ordinary income rates on it So why not the cheaper

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long term gain rates Well why Because it was income

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active income you earned and quote should have been unquote

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taxed as ordinary income when you earned it But you

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weren't so well now it's time for the tax man

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teo You know coming the logic behind the creation of

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the ira was that investors in it would be paying

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a lower tax rates when they were old I e

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making less money as geezers than they did when they

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were in the peaks of their careers So under the

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progressive tax system whose rates look something like this instead

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of paying a marginal rate of say forty three percent

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on that five grand that was saved as a geezer

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taking out relatively small amounts toe live on Well you're

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paying more like thirty percent or less on that marginal

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dollar So how much do you take out of the

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ira Alright well there's that schedule thing again And the

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focus is the minimums you must withdraw What you khun

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distribute to yourself more than the minimums But then you

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have to take out a set percentage each year So

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here's how that works Look at the table here Right

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here They ira required minimum distribution worksheet in eight seventy

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You're going to divide us Say at a million bucks

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in there you're gonna divide that by twenty seven point

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four That's the amount you have to distribute this year

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Let's say the market went up Whatever One twenty seventh

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is more than that even And well then all the

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sudden of a million two or a million three Well

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by aged call it eighty You have to distribute whatever

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that amount is divided by eighteen point seven You get

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all the way to one hundred Well you have to

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basically divided by six and that's the amount you have

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to distribute So let's say you had a i'll say

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had six hundred thousand dollars in there at eight hundred

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you're going divided by six point three means that six

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hundred thousand You have to distribute one hundred grand back

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to yourself leaving you five hundred grand Yeah that's kind

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of how the system works in more or less Anyway

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that twenty seven numbers the denominator in the total assets

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in the ira get divided by it And that's the

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number The ira beneficiary which would be you if it's

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your ira must take out of the ira fund in

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this year and notjust how much age matters here In

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fact it's kind of everything in this calculation So let's

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look at age seventy seven for example the divisor here

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is twenty one point two That means that whatever the

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total assets worrying the ira as of the end of

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the year that amounts divided by twenty one point two

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And it's that amount that must be taken out of

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the ira and quote distributed to you unquote usually in

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the form of your writing A check out of the

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ira to yourself that's housed in your normal brokerage account

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So let's say that at seventy seven you had a

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million bucks from your hard earned scrimping and saving You

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take a million dollars in the numerator and divided by

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twenty one point two to get forty seven thousand one

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hundred seventy dollars It's that amount that you'd have to

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take out of the ira and be taxed on at

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ordinary income rates and well hopefully live to fight another

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day Notice that the divisor increased dramatically as you get

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older here like we said And when the iris starts

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at age seventy divide by twenty seven point four We

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only have to distribute a small amount of doughty yourself

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a few percent and be taxed on it But by

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eight hundred here Yeah you're doing the six point three

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dance Meaning that the government doesn't think you're gonna live

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much longer Well why do they do that Yeah well

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here's the guy thing is knocking really loud by age

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one hundred Very few people live past that age And

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those who d'oh well usually have trouble hearing the doorbell

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