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May 24, 2022

Switching withdrawal methods could preserve retirement savings

In your quest for early retirement, you may have taken advantage
of an IRS rule that allows you to tap into your tax-deferred
retirement accounts before reaching age 59.
In your quest for early retirement, you may have taken advantage of an IRS rule that allows you to tap into your tax-deferred retirement accounts before reaching age 59. Under this rule, you are allowed to take fixed, recurring withdrawals from your IRAs and other retirement accounts without incurring the usual 10-percent early withdrawal penalty.

Once you start taking these fixed distributions, you are locked into taking the distributions for at least five years. If you change the amounts withdrawn or stop taking distributions before then, you face a 10-percent penalty on the entire amount withdrawn.

To calculate the fixed withdrawal amounts, you must use one of the IRS’s allowable methods. Two of these methods are based on the value of your account when withdrawals began. Initially, using either of these methods might have seemed fine. However, the recent decline in the stock market may have significantly reduced the value of your retirement accounts. That means if you continue taking distributions based on older and higher plan values, you could deplete your retirement accounts more quickly than you expected.

Fortunately, the IRS has now addressed this concern by allowing you to make a one-time switch to a new alternative method for calculating withdrawals. This alternative calculation allows you to base your distribution amounts on the plan’s value at the end of the prior year instead of when you began taking distributions. Thus the required withdrawal amounts will increase or decrease each year as the value of your retirement account changes.

Switching methods could help preserve your retirement savings. But keep in mind that this is a permanent switch, and you should fully understand what’s involved. If you’d like details about changing methods, contact our office.

Mary Hubbell is a partner with the accounting and business consulting firm of Bianchi, Lorincz & Co. in downtown Hollister and in Morgan Hill

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