THE NO-COMPROMISE RETIREMENT PLAN • 41
withdraw a minimum amount from your IRA each year. Why? Because you’ve built up a lot of tax-deferral in your account, and the IRS wants to collect its tax money. It requires you to withdraw (and pay taxes on) a set minimum amount each year, which is calculated as a percent of your account value based on your life ex- pectancy. (If you don’t withdraw your RMD, you will be subject to a penalty tax of up to half of your missed RMD — the IRS is not playing around.) • My IRA funds will be taxed when I reinvest them in a taxable account. I’ll show you the same example with these funds spent as income next, but for now remem- ber I’m taking the funds and putting them in a taxable money market account. • My IRA value will be taxed when I die, and the remain- ing funds are passed to my heirs. Remember, unlike es- tate taxes, income taxes are due when funds are withdrawn from a qualified account. So, if you leave your spouse or children your remaining IRA value, they will have to pay income tax when accessing those funds. For a spouse, this could mean accessing the funds at a single, rather than married, rate, which can increase taxes on the surviving spouse. For children, this means accessing the funds within the next ten years, as the re- cently passed SECURE Act has eliminated the option for most heirs to “stretch” those IRA distributions. For this analysis, I’ve assumed all taxes on my remaining IRA account balance are paid if I happen to pass away at age ninety. If my heirs hold them in the tax-deferred account beyond that, the situation is even worse than the following analysis, as the additional investment earnings would also be taxed.
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