Non-qualified vs. Qualified Money
Non-qualified money has already been taxed, like your bank accounts, CDs or Roth IRAs. Taking money out of these accounts does not trigger income taxes.
Qualified money is your retirement plan money—it is pre-tax money like IRAs and 401(k)s. Income taxes are due on the amount you withdraw from these accounts in the year that you withdraw it.
Required Minimum Distributions (RMDs)
Required Minimum Distributions, or RMDs, are required by law starting at age 70 and a half. These trigger income taxes, sometimes at the highest tax bracket—which is almost 40% of your retirement savings paid out to Uncle Sam! This is the main reason it’s important to have a retirement plan in place.
Hypothetically, let’s say that over 20 years, your $250,000 IRA account grew into a million dollars. That sounds great, right? It sounds great until you realize that when you are forced to start withdrawing, you may be pushed into the very top income tax bracket. You might be age 80 and paying 40% of your IRA money out to the IRS.
Converting some of your qualified accounts into Roth IRA may offer three advantages to retirees. Number one, it grows tax-free. Number two, it generates income back to you while you’re alive, tax-free. Number three, it passes to your beneficiaries, tax-free. Roth conversion may very well be the biggest tax-saving strategy of your lifetime.
Convert qualified plans to Roth accounts over five to seven years as part of a tax reduction strategy.
Retirement Distribution Planning
Custom, individualized retirement planning revolves around distribution planning, so that you can take withdrawals from your retirement nest egg every month as income without anxiety. Be sure to work with a retirement expert to review your combination of qualified and non-qualified assets and build a custom distribution plan designed to minimize taxation and maximize your retirement income.