What happens when you take IRA, 401(k) money

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Q. IRAs and 401(k)s seem like great saving plans for retirement, especially when the employer contributes. They tell you when you start taking your Required Minimum Distributions (RMDs), the amount is taxed, which may or may not be higher than while working. What they don’t tell you is in addition to that, because it adds to your total income, it can cause your premiums for Medicare Parts A, B and D to be higher. This does not seem fair.
— Looking closely

A. Fair or not, it is what it is.

Money that was contributed pretax to an IRA or 401(k) must, by law, begin to be distributed in the year you turn 70 1/2, said Jody D’Agostini, a certified financial planner with AXA Advisors/The Falcon Financial Group in Morristown.

She said the government has incentivized us to start saving for our retirement by allowing tax-deferred growth up until that time.

Remember, you might work for 30 to 40 years, but with longevity increasing, you might have a 30- to 40-year retirement, she said.

“Once you hit 70 1/2, you must start to taking distributions, called RMDs, based on your life expectancy,” she said. “This will be taxed at ordinary income tax rates, which generally are lower if you are not in the work force.”

D’Agostini said the government began imposing a surcharge on Medicare called IRMAA (Income-Related Monthly Adjustment Amounts). This begins when income exceeds $170,000 if you are married, or $85,000 as a single, she said.

These surcharges rise in four increments with the highest income earners paying $428.60 per month per person for Part B and $76.20 per month per person for Part D, and you are charged this for the entire year.

“The income used is based on your 2016 income for 2018,” she said. “If you exceeded the threshold because you were still working, it’s likely that if you retired, this will push you down in the brackets.”

One way to avoid moving up to the next bracket, D’Agostini said, is to gift all or part of your RMD to charity directly from your IRA.

“If you are already contributing, this is a more tax-efficient way and can avoid additional income on your tax return,” she said.

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