IRA Withdrawal Stategy
Dear Sir:
I am currently drawing several retirement checks totaling $49,400 and have just started(Feb 2014)drawing Soc. Sec.–yearly total 28,520. I have rental income(2 houses) of about 6000K per year also. No debt. I substitute teach each year so I still have earned income each year.
Over the years I have always contributed to a Deductable IRA each year and had a 401K with the company I worked for. Today the IRA is around 59K and the 401K has been rolled over to an IRA with TROWE Price. Its value is 178500.
I need help in developing a strategy for withdrawal of these IRA funds in order to pay the least tax into the future.
I am aware that I can wait to 701/2 and start withdrawing then, but I would like to make the most tax wise decision going forward.
Help. and Thanks in Advance. I do have your CDs that I bought from ED’s program on PBS several years ago.
Ray Mixon
Permalink Submitted by Alan - IRA critic on Wed, 2014-02-12 19:38
The solution would be to convert incremental amounts to a Roth IRA, where the conversions could grow tax free and the amount converted would no longer by subject to RMDs. However, having started SS benefits makes this planning difficult because withdrawals or conversions of a certain amount can trigger taxation of up to 85% of your SS benefits. While this is happening, your 15% bracket is actually 27.75%. Therefore, you may need help from a tax pro to determine how much to convert each year, or even if conversion is of any benefit at all. It would have been much easier if you had delayed SS benefits to bank the 8% bonus for each year as this would have freed up space to convert at lower tax rates for a few years before SS benefits would have begun.
Permalink Submitted by Ray Mixon on Thu, 2014-02-13 13:56
Thanks Alan–Yes I now realize I should have moved the IRA to Roth before starting SS. I waited till 66 to take SS and have plenty of retirement income. I may just continue with my stratedy of deducting 6500/year in a Deductable IRA til I reach 70 in about 4 years in order to stay in the 15% tax bracket and then after 701/2 start taking the minimum year as required by the IRS. I will ask our CPA to determine how much to take out or if conversion is of any benefit as you suggested. Thanks for your input Alan. Ray MixonP
Permalink Submitted by Alan - IRA critic on Thu, 2014-02-13 16:51
Since your IRA is not huge in relation to your other income, and therefore your RMDs will not be large, incremental small conversions could be made even after you start RMDs. But once you reach 70.5, if you wish to convert you must take out your RMD before converting any additional amounts and of course you cannot convert the RMD amount. The usual criteria in determining if conversions are beneficial is whether the tax bill for the conversion is at a rate equal or lower to what you would pay in retirement if you did not convert various amounts. The analysis of course includes some guesses in making projections.
Permalink Submitted by Ginny Trautman on Thu, 2014-02-13 19:26
I’m not a financial expert, but if Ray is within 12 months of starting social security can’t he suspend his benefits (one-time only) and resume later at an increased benefit amount?
Permalink Submitted by Ginny Trautman on Thu, 2014-02-13 19:41
Here’s a link to the SSA website. Looks like if you’ve already started benefits it’s called withdraw/re-apply, not suspend/resume, and you’d have to pay back benefits already received. http://www.ssa.gov/retire2/suspend.htm