Q. My employer used to give us a yearly contribution for a SEP account. Usually the bank set it up as a CD, but one time it was set up with John Hancock. I received notice that I have to take a Required Minimum Distribution (RMD) because I’m turning 70 1/2. The value of the contract is about $5,900. Is it wiser to take yearly distributions or just withdraw the whole amount and pay the taxes?
— Trying to save
A. You’re going to have to look at your tax situation to answer this question.
If you take annual withdrawals, the funds not withdrawn will continue to earn income tax-deferred, said Martin Hauptman, a partner in the trusts/estates and taxation groups at Mandelbaum Salsburg in Roseland.
You will also pay a smaller annual income tax.
But if you take the money out in a lump sum, you will pay the tax on the full amount all at once.
“The lump sum withdrawal may change your federal income tax bracket,” Hauptman said. “This could cause a larger portion of your Social Security benefits to be subject to income tax.”
Plus, he said, if you take a deduction for medical expenses, it’s based on a percentage of your adjusted gross income.
“Thus, if your gross income goes up, the amount of medical expenses that are deductible will decrease,” he said.
Consider sitting down with your tax preparer before making a decision.
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