IRA withdrawal while in lower tax bracket
I am 65. My wife is 62. We are currently living on two pensions from employment and some inheritance money. Our combined taxable income from pensions is 45k which places us in the 15% tax bracket. Financially, I will probably need to start taking SS at age 67(Jan. 2013). When I start drawing S. Sec. at age 67 of $2500 mo., our taxable income will put us in what is currently the 25% tax bracket. Thus, any withdrawals from my IRA in the future would be taxed at that higher 25% rate, or whatever the rate will be at the time (likely higher). My questions are:
1. Would it make sense to take just enough money out of my IRA this year and next to keep us in the 15% tax bracket and pay those taxes now as opposed to being in a higher tax bracket when I collect SS and when we start making required IRA withdrawals? We would use that IRA money to live on.
2. If the answer to #1 is yes, would it make sense if we can, to continue that IRA withdrawal strategy of doing it while in a lower tax bracket and thus be able to postpone SS to age 70 and get much more for a guaranteed monthly check?
Steve
Permalink Submitted by Alan Spross on Sun, 2011-06-12 02:37
Yes, it is a good idea to utilize your 15% bracket now since it appears that once you start SS and RMDs, you will never be in that bracket again. If you don’t need all the extra 23k or so for living expenses, you should convert the balance to a Roth IRA where it can generate tax free earnings after 5 years if this would be your first Roth IRA. Or you could convert to a Roth IRA up to the top of your 15% bracket first and then take the distributions you need from the Roth IRA. There is no conversion holding requirement after age 59.5.
There is also another SS strategy to consider while you bank delayed retirement credits of 8% per year:
1) If your spouse’s primary benefit will be less than half of yours, you could file and suspend at 66 and she could collect half your benefit less early retirement penalties.
2) Or if your spouse’s primary benefit will be more than half of yours she can file on her record and at 66 you could file for a spousal benefit of half of her primary benefit and collect that for up to 4 years while you are banking an 8% increase per year on your own record. (you can’t both collect spousal benefits at the same time).
It appears that 85% of whatever joint SS benefits you and your wife collect will be included @ 85% in your AGI. That’s still 15% that is tax free with COLA benefits down the road. It is also simpler in the respect that you are past the phase in AGI level where every dollar of AGI makes more of your SS benefits included in AGI. Therefore it appears there is no way to avoid that phase in after you start taking SS benefits.
Permalink Submitted by stephen barrymore on Mon, 2011-06-13 15:28
Thank you for advice. Your info about SS was right on. I did all the “what if” spreadsheet scenarios last night and the file and suspend results were surprising. I had read a little about it before, but your mention of it caused me to actually “do the numbers” and see the hard facts. I will probably go that route because it would fit us well. Thanks again.
Steve