Monday, June 13, 2016

Why You May Want to Take IRA Money at 59½


Every year at tax season, people get distressed over how much they owe in taxes due to required minimum distributions from their individual retirement accounts.

At that point it’s usually too late to substantially alter the bill, which is why proactive tax planning is so important.

Conventional wisdom says you shouldn’t touch IRA money until you’re required by law to do so, at age 70½. We advise a different approach. By taking careful distributions from IRAs beginning at age 59½, when the early-withdrawal penalty no longer applies, many investors can reduce future distributions that may inadvertently push them into a higher tax bracket in their later years.

For most retirees, the 15% federal tax bracket is a comfortable goal to achieve through a smart investment strategy and a controlled distribution of their IRA before required minimum distributions begin. A jump from the 15% bracket to the 25% bracket may result in an extra 10 cents on the dollar going to the government.

Taking money out of an IRA as soon as you turn 59½ can also help with inheritance planning. Parents are generally in a lower tax bracket than their working children. Since IRA distributions are taxed as ordinary income, it’s sometimes smarter for parents to take the distributions as soon as possible and pay taxes at the lower rate.

Finally, early distributions can help lessen the tax impact after a spouse dies. Surviving spouses still have to take required minimum distributions on inherited IRAs, and they are typically in a higher tax bracket when filing as a single individual instead of jointly.