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Anne, Master Tax Preparer
Category: Tax
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Experience:  Enrolled Agent with 25 Years Experience specializing Individual and Small Businesses
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Am Funds IRA Tax Question

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In 2003 my mother was a beneficiary of a "CB&T CUST IRA R/O American Funds" acct that she has since maintained without making any withdraws. She is now 65yo, divorced and considered "single", and currently lives in Washington, DC. She now has a desire to close out her entire portfolio and withdraw all the available funds.

My understanding is that throughout the past 10 years of owning the IRA acct, she was not liable for paying any taxes up until the day she makes a withdrawal. Assuming that is correct, approximately how much should she expect to pay in taxes? How would it be filed exactly (ie; would it be as if it were earned income)? Would she be taxed on the principle, interest, or both? The entire portfolio is estimated at around $65,000 - what would be the tax percent cut? Her current annual income is $10,000/yr. Thanks in advance for your help.

Hi Jeff

Thank you for your question.

You are absolutely correct that your mother will have to pay tax on any distributions she receives.

If she were to take the full distribution in one year, she would be in the 15% tax bracket.

While that's not so bad, (and she can have her Federal taxes deducted from her IRA) , what she really needs to take into account is her Social Security Benefits.

Generally, Social Security benefits, in and of themselves, and not taxable, UNLESS you put other taxable income with an IRA for example, and those benefits could become up to 85% taxable.

A better alternative may be to spread the IRA distributions over a couple of years, thus keeping her taxable SS benefits at a minimum. For example, she may take part of her IRA in Nov or even December of 2013, and then take the rest in January 2014.

You will probably want to find a local CPA, EA, or tax pro to let them crunch the numbers for you.

I truly hope this information is helpful but please do not rate until you are satisfied. If you want to click on 1 or 2 just click on the continue to work with me button instead. You will then be able to add any other info or respond to what I have posted so far. Rating 3-5 gives me credit and a good rating but you can still converse with me.

Customer: replied 4 years ago.

Thanks for the prompt response.

To follow-up;

Splinting the distribution into two tax years to offset the higher taxable social security benefits make sense, however my mother has not yet claimed any of her SS benefits (she plans to start claiming next year after turning 66yo) - which may have been a good thing if that means what I think it does... Having no SS benefits claimed this year, does that mean she would only be taxed for her $10,000 annual income, PLUS the 15% tax bracket for the $65,000 CUST IRA R/O? If that's the case and she opts to close out the entire account this year, it wouldn't have any impact on her SS benefits (tax-wise) when she files for it in 2014, correct?

Thank you,

Yes, if she's not taking any of her SS benefits until she turns 66, then this would DEFINITELY be the best year for her to take the IRA distribution.

As for her tax bracket, she will be in the 15% bracket for brackets are based on total income AFTER your personal exemption and standard (or itemized) deductions.

I hope this helps.
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