One extremely common misconception about the IRA is that you own 100% of it. The reality that all too often many overlook, is that you have a partnership with the IRS, aka Uncle Sam. Let’s say for instance that you have an IRA valued at $500,000 and you are in a 33% federal income tax bracket, the IRS has a future ownership of roughly $165,000 of your IRA! Sounds harsh right? Well, this is the contractual agreement you made with the IRS when you tax-deducted your contributions. In plain language, you agreed to save taxes early on, but now you owe taxes on the yield when you take it out. At a certain point, your partner the IRS will determinewhen you’ll pay up the big tax bill and how much of it you owe as time goes on. If your tax bracket jumps to 50%, now Uncle Sam owns HALF of your Retirement Account! The same principles are applied to 401(k)s, 403(b)s, 457s and all other qualified retirement accounts.
MYTH #2 – You Can Dodge Taxes…
Another fairy tale. The only way your money can come out of the vault is through the armed guard, the IRS, and believe me there is no negotiating your way out of this contract! Everyone with IRAs are required by the 1st of April of the year after you turn 70 1/2 to take taxable distributions. If you experience an untimely death while owning an IRA, wait for it…Your HEIRS will inherit the tax bill. Either way the taxes must be dealt with exactly how the IRS says and all who do not comply will suffer the consequences, which unfortunately is a horrific increase in your tax bill. Thankfully, there are strategies out there that help put the IRA owner take more control of their accounts so they can cut how much tax will be paid.
MYTH #3 – You’re Powerless…
Lucky for you this is the largest myth of the three. Even though you don’t own the entirety of your IRA(s) and there is no way to dodge to dodge the taxes on IRA distributions, account holders can still strategically increase their income while minimizing the burden of taxation. This type of planning is where a Retirement Advisor plays a crucial role in leading you through the intimidation of regulations, penalties, and deadlines, while getting you the most out of your IRAs 401(k)s, and other retirement accounts.
