A
look at some popular & obscure options for receiving money with little or
no tax.
Provided by Benjamin Bogetto
Will you
receive tax-free money in retirement? Some retirees do. You should know about some of
your options for tax-free retirement distributions, some of which are less
publicized than others.
Qualified
distributions from Roth accounts are tax-free. If you own a Roth IRA or
have a Roth retirement account at work, you can take a tax-free distribution
from that IRA or workplace retirement plan once you are older than 59½ and have
held the account for at least five tax years. One other nice perk: original
owners of Roth IRAs never have to take Required Minimum Distributions (RMDs) during
their lifetimes. (Owners of employer-sponsored Roth retirement accounts are
required to take RMDs.)1,2
Trustee-to-trustee
transfers of retirement plan money occur without being taxed. In a rollover of this
kind, the custodian financial firm that hosts your workplace retirement plan account makes a payment directly out of
the account to an IRA you have waiting, with not a penny in taxes levied or
withheld.
Trustee-to-trustee transfers of IRAs work the same way.3
If you are
older than 80, you might get a tax break on a lump-sum withdrawal. If you were born prior
to January 2, 1936, you could be entitled to a tax reduction on a lump-sum
distribution out of a qualified retirement plan in certain cases.
Unfortunately, this is never the case with an IRA RMD.4
Your heirs
could receive tax-free dollars resulting from life insurance. Payouts on permanent life insurance policies are normally
exempt from federal income tax. (The payout may be included in the value of
your taxable estate, though.) A life insurance
death benefit
paid out from a qualified retirement plan
is also tax-exempt provided the death benefit is greater than the policy’s
pre-death cash surrender value. Even if an employee takes a distribution from a
corporate-owned life insurance policy on his or her life while still alive,
that distribution may not be fully taxable as it may constitute a return of the
principal invested in the life insurance contract.4,5
Sometimes
the basis in a workplace retirement account can be withdrawn tax-free. If you have made
non-deductible contributions through the years to an IRA or an
employer-sponsored retirement plan account, these contributions are not taxable
when they are distributed to the original account owner, accountholder, or an
account beneficiary – it is considered return of principal, a recovery of the
original account owner or accountholder’s cost of investment.4
IRA
contributions can optionally be withdrawn tax-free before their due date. As an example, your 2016
IRA contribution can be withdrawn tax-free by the due date of your federal tax
return – April 15 or thereabouts. If you file Form 4868, you have until October
15 (or thereabouts) to do this.6
Withdrawals such as these can only happen,
however, if you meet two tests set forth by the IRS. First, you must not have
taken a deduction for your contribution. Second, you must, additionally,
withdraw any interest or income those invested dollars earned. You can also
take investment losses into account. (There is a worksheet in IRS Publication
590 you can use to calculate applicable gains or losses.)6
These common and obscure paths toward
tax-free retirement income may be worth exploring. Who knows? Perhaps, this
year, your retirement will be less taxing than you think.
This material was prepared by MarketingPro, Inc., and does not
necessarily represent the views of the presenting party, nor their affiliates. This
information has been derived from sources believed to be accurate. Please note
- investing involves risk, and past performance is no guarantee of future
results. The publisher is not engaged in rendering legal, accounting or other
professional services. If assistance is needed, the reader is advised to engage
the services of a competent professional. This information should not be
construed as investment, tax or legal advice and may not be relied on for the
purpose of avoiding any Federal tax penalty. This is neither a solicitation nor
recommendation to purchase or sell any investment or insurance product or
service, and should not be relied upon as such. All indices are unmanaged and
are not illustrative of any particular investment.
Securities offered through First Heartland Capital, Inc. Member FINRA/SIPC
Bogetto Financial is not affiliated with
First Heartland Capital, Inc.
Citations.
1 -
irs.gov/retirement-plans/retirement-plans-faqs-on-designated-roth-accounts
[1/26/16]
2 - irs.gov/retirement-plans/retirement-plans-faqs-regarding-required-minimum-distributions
[7/28/16]
3 - irs.gov/retirement-plans/plan-participant-employee/rollovers-of-retirement-plan-and-ira-distributions
[2/19/16]
4 - news.morningstar.com/articlenet/article.aspx?id=764726
[8/13/16]
5 - doughroller.net/personal-finance/life-insurance-proceeds-tax/
[8/18/16]
6 - tinyurl.com/gwoxed8 [8/18/16]
