When you withdraw money from your IRA (or if you inherited an Individual Retirement Account from someone and take yearly distributions), don’t fool yourself.
Just because you withdraw money from a retirement account does not mean that you actually made that money. Rather, you might just be pulling out your principal.
Since I work with American citizens living in Israel who have retirement accounts in the States, I will use an example that I see a lot: Once an American turns 72 years old, if he has money in a traditional IRA, he must begin to take “required minimum distributions.” That simply means he needs to take out a certain amount of money every year. The IRS mandates this withdrawal because they have never earned any taxes off this money and they want to make sure they get some tax revenue before the person dies.
Example of IRA distribution
Let’s say a $500,000 portfolio is kept in cash in an IRA account that earns 0%. If the required distribution is $10,000, someone might withdraw that money and spend it as though it is income. It’s true that he will be taxed on the withdrawal as if it were income, but he did not actually make any money in an IRA from the cash investment. Rather, he just took out principal.
Can you actually invest money and make money in an IRA?
Instead of making almost 0%, he could have invested the IRA money and not paid U.S. tax on the capital gains, dividends, or interest (speak to an accountant to understand your situation, and whether you may owe taxes to Israel). For some people, it may be wise to have growth stocks or equity funds (as opposed to cash or annuities) within an IRA. For others, consider buying bonds or bond funds, certificates of deposit (CDs), and other more conservative investments. Make sure to discuss you goals and risk tolerance with both a financial advisor and an accountant to properly structure your portfolio.
For more information about IRAs, go to Profile-Financial.com/inheritedIRA or call 02-624-2788.
If you’d like to find out about buying FDIC insured CDs (Certificates of Deposit) while you live in Israel, or have questions about your IRA account, feel free to call my office at 02-624-2788 or send me an email at doug@profile-financial.com.
Douglas Goldstein, CFP®, is the director of Profile Investment Services, Ltd. www.profile-financial.com. He is a licensed financial professional both in the U.S. and Israel. Call (02) 624-2788 for a consultation on how to set up your American assets to meet your financial goals. Securities offered through Portfolio Resources Group, Inc. Member FINRA, SIPC, MSRB, FSI. The opinions expressed are those of the author and not those of Portfolio Resources Group, Inc. or its affiliates. Neither PRG nor its affiliates give tax or legal advice.
Published July 27, 2018. Updated May 27, 2022