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Tax Law (Questions About Taxes)/Taxing retirement disbursement and IRA


Hello Randall, I am 67 and I have ended my employment with Dallas ISD in order to get my retirement which the district has for me. They tell me that there is a mandatory 20% income tax withholding unless I put the money into an IRA or other "retirement plan' . I am planning to move to the Philippines and I would like to start a business there with Business Process Outsourcing. When I do that I will not be working but I will live off of my Social Security.
Several questions.
1) Is there any provision for starting a business in the "retirement plan"?
2) Who can be my "Retirement Plan Custodian"?
3) If I am not working, but only recieving my social security, will it reduce my taxable income enough that I will not need to pay the 20% tax?
4) Any strategies to reduce my income to prevent payment of the 20%?
   Thank you in advance for your valuable service.

Hi Kenneth, in general, you can use your funds for any purpose. However, the funds can not be distributed tax free in order to start a business. As far as a Retirement Plan Custodian, to roll over your retirement plan, generally that will be the bank or institution that you open the IRA with.

If you rollover the retirement plan into another retirement account, such as an outside IRA, there shouldn't be automatic withholding. However, as far as any tax due when you start distributions will depend on your total income received during the year (from retirement distributions, social security, other income, etc). If your only income is the social security, no tax will be due. However, if you are over a base threshold, depending on your filing status and type of income, it is possible to have some tax due.

The best strategy (if possible, when factoring in any required minimum distributions) is to keep your income below the threshold for taxation (or to minimize as much as possible).

For example, if you file a federal tax return as an "individual" and your combined income is between $25,000 and $34,000, you may have to pay income tax on up to 50 percent of your benefits. If your total income is more than $34,000, up to 85 percent of your benefits may be taxable. The taxable amount/rate will depend on your total income and applicable deductions.

All the best,

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Randall Brody, EA, MBA, CCP


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