The hottest tax topic these days is what to do with an IRA. A lot of people are fed up with mutual funds and other typical IRA investments, so they are looking to either pull their money out of their IRA, convert the IRA to a self-directed IRA, or convert to a Roth IRA.

One such person is one of our School of Tax Strategy students, Lillian. Lillian asks the following question:

Q: How can I save the most taxes for next April when I cash out part of my IRA? It is not a Roth, it's a mutual fund type that increases and decreases depending on the market. I am also thinking about coverting some of it into a self-directed IRA.

A: If you are not yet 59 ½ years old, then you will be taxed at ordinary income rates for any money you pull out of your IRA plus a penalty tax of 10%. You can convert any part of this to a self-directed IRA without paying any tax, so long as you do a trustee-to-trustee direct transfer (you don’t actually touch the funds). This year, you can also convert to a Roth IRA without any penalty and you just pay the tax. I have written previous blogs on the conversion to a Roth IRA that you may want to read.

For the portion of the funds you want to take out, not much you can do. There are some exceptions to the penalty rule, but they don’t give you much control over the funds so I tend to ignore them. The real question is what are you going to do with the funds? If you are going to spend them for personal purposes (vacation, home, etc.) then you really will just have to pay the tax and penalty.

There are some investments that give you great tax benefits right off the bat that would help reduce the tax hit from the withdrawal, such as oil and gas investments and certain real estate investments. Still, I suggest you meet with your Wealth Strategist and formulate a wealth strategy first and then meet with your Tax Strategist to decide how to handle your IRA.

For more information about ProVision Wealth and Tax Strategists, call our office at 866.467.5809 and ask for Gennifer.

Warmest regards,

Tom