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IRA Withdrawals May Not Be Required

…but for many taxpayers it still makes sense to withdraw at least a reduced amount.

August 13, 2009
Sponsored by Gear Up

This suspension of required distributions may make good sense for most retirement accounts, in which the distressed securities would have to be sold at current prices in order to raise the cash necessary to make the withdrawals.

Yet, it may not be the best strategy for owners of self-directed traditional IRAs.

Owners of self-directed IRAs are permitted to make these withdrawals in kind. Present market conditions provide an opportunity to withdraw from a traditional IRA the securities that the owner wants to continue to own, with the income tax incurred being based on the depressed value.

This strategy could provide possible future capital gains benefits if the securities are sold while the owner is alive or basis step-ups if the securities are eventually sold by the heirs or the estate.

Most IRAs are not self directed. For these taxpayers care must be taken not to leave money in the table. For many taxpayers the IRA withdrawal is a significant part of their taxable income. If taxpayers eliminate completely their IRA distribution in 2009 they may end up with zero or negative taxable income after the standard deduction, itemized deductions and exemptions.

In such a case it would be prudent to take as much distribution as would be allowed without having to pay tax. Some may want to take more if it will be taxed at lower brackets than would be the case in future years with the full required minimum distribution.

For these taxpayers it is necessary to project taxable income with and without the IRA distribution. Fortunately taxpayers can wait until later in the year to decide on the amount of the distribution as long as it is made by December 31, 2009.

Published in the June 2009 issue of the Gear Up Gold Rush newsletter available from the Tax & Accounting business of Thomson Reuters. Copyright © June 2009. To learn more about Gear Up, visit trainingcpe.thomson.com/GearUp.