When Tapping Your IRA First is Your Best Move

When taking withdrawals at retirement, conventional wisdom says to withdraw money from your taxable accounts first, then tax-deferred accounts (like a traditional IRA or 401k) and finally your tax-free accounts (such as your Roth IRA).  The longer the money stays in your tax-deferred and tax-free accounts, the more time they have to grow.

According to this article, tapping your IRA in the early stages of retirement may help you increase your wealth.  How?  If you start taking withdrawals before you turn 70 (and before you have to take required minimum distributions), those RMDs could become smaller, thus less taxable income and it may keep you in a smaller tax bracket.

Says Tom & John Mills, “The key is sheltering some or all of the early IRA withdrawals with IRS standard deductions and personal exemptions. As an example, take a married couple in which both spouses are at least age 65. The spouses have done their homework and determined that their IRS deductions and exemptions will add up to $21,800 for 2012. If their taxable income before any IRA withdrawal would fall below $21,800, they could use withdrawals from tax-deferred IRAs to create tax-free income.”

Rider University conducted a study with 15 model scenarios.  Each included a married couple aged 65 retiring in 2013 with $2 million in investable assets, $80,000 in living expenses and $30,000 from Social Security.  70% of the assets were in traditional IRAs, 20% in taxable accounts and 10% in Roth IRAs.  The portfolio earned 6% annually.

“The results of the study reported that from age 65 to age 70, the couple drew down their traditional IRAs right to the limit of their combined deductions and exemptions. Then, they reached into their taxable accounts for the balance of the money needed to meet that $80,000 in expenses, incurring some long-term capital gain taxes. They didn’t tap their Roth IRAs.

After age 70, they altered their approach. They took required IRA distributions, withdrew money from taxable accounts until exhausted, and then they turned to Roth accounts with the remaining balances on the traditional IRAs representing the last of their retirement savings.

The hypothetical couple still had $1.61 million in their portfolio at age 95. The conventional withdrawal strategy (taxable accounts first, then tax-deferred accounts, then tax-free accounts) left them with just $1.17 million.”

This strategy may not work for you so the best advice is to contact your financial adviser.  As always, the tax experts at the IRA Financial Group are here to help you as well.  Give us a call at 800.472.0646 or visit our website now!

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