A new tax law signed by Governor Kay Ivey in April of 2022 takes effect on January 1, 2023. The law offers a state income tax exemption of up to $6,000 per individual for distributions made from qualified retirement accounts, such as IRAs and employer-sponsored 401(k) plans, if the taxpayer is age 65 or older. Prior to the law’s passage, Alabama limited state income tax benefits to defined benefit pension plans.
For weekly insights, follow The Welch Group every Tuesday morning on WBRC Fox 6 for the Money Tuesday segment.
Below are some example scenarios that highlight withdrawal strategies taxpayers should consider based on this new law:
Scenario #1: Both Spouses with Traditional IRAs
Assumptions:
Both spouses have Traditional IRAs
No other investment accounts
Family has a $12,000 cash flow need from their portfolio
Recommendation:
Consider distributing $6,000 from each spouse’s respective IRA to maximize the state income tax benefit. Remember, the $6,000 exemption is offered per individual, so a married couple filing a joint tax return can receive up to $12,000 in state income tax exemption (saving upwards of $600 in taxes).
Scenario #2: Both Spouses with Traditional IRAs; One with Pension IRA
Assumptions:
Both spouses have Traditional IRAs
One spouse or more has a Rollover Pension IRA from a defined benefit pension plan
No other investment accounts
Family has greater than $18,000 cash flow need from their portfolio
Recommendation:
Again, consider distributing $6,000 from each spouse’s IRA to maximize the state income tax benefit. With the remaining $6,000 of cash flow needed, look to distribute this money from the Rollover Pension IRA, as this distribution can be made state tax-free due to its origin as a part of the defined benefit pension plan.
NOTE: The key with the above scenarios is to be as tax efficient as possible with how you distribute money from your retirement/investment accounts to meet your specific cash flow need. While these strategies will not make you rich, every bit of savings can alleviate pressure in other areas of your financial life. Be sure to consult with your certified financial planner before making any changes to your distributions.
