This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Time to Retire One IRA Withdrawal Strategy

HUNT VALLEY, Md. ( TheStreet) -- Among the theories on how to withdraw funds from an IRA in the most tax efficient manner, here are three popular concepts:

  • Withdraw some funds in your 60s so less is required to be withdrawn in your 70s based on the required minimum withdraw.
  • Wait until the end of each year before withdrawing.
  • Convert to a Roth IRA to eliminate all future taxation since tax rates are supposedly going higher.

Each concept has some merit, but assumptions are necessary to validate them.

Withdrawing from your IRA in your 60s when there is no need makes zero sense today. There are better strategies.

The idea of withdrawing from your IRA in your 60s when there is no need makes zero sense today, even if it did two years ago. The idea is to take money out and pay taxes on it so your balance is not so large when you turn 70.5 (the age you are forced to take required minimum distributions). The concept was flawed to begin with, but now is completely without merit since you are now eligible to do a Roth conversion.

Beginning last year, Roth conversions were made available to anyone with money in a tax-deferred retirement vehicle. If you are going to take money out you don't need and pay taxes on the proceeds, that money should be deposited into a Roth IRA -- period. Anyone over 59.5 years of age can always take the principal from the Roth without penalty, and if they have had a Roth for at least five years all proceeds (including income and gains) are tax-free from day one. If the converted amount is your first Roth IRA, you have to wait five years to take the income and gains, but the principal is always available.

The idea of waiting until the end of the year is a good general rule for someone who does need the proceeds during the course of the year, but there is one very serious exception to the rule. The reason the rule works in general is due to how the RMD is calculated. If your account grows during the year, the growth of the funds on the RMD would remain tax deferred in the account even after the RMD is withdrawn. If you have to withdraw $10,000, take it immediately and deposit the proceeds in a taxable account; then the funds lose any growth for the year. If the account grows by 10% that year, and you withdraw the $10,000 required amount in December, the $1,000 of growth that remains in the account stays tax deferred.

The exception is for people who are older or in poor health. In this situation an investor who dies in the course of the year and had not taken their RMD (because they always wait until the end of the year) would require the beneficiaries to take the RMD pro rata and pay the appropriate taxes. For people over 80 years of age or those in poor health, try to get the RMD at the beginning of the year. This assures you the RMD will be taxed to the account holder and not the potential beneficiaries. The reason this is important is that the beneficiaries are normally children in their maximum tax bracket of their life or, if the account holder dies early in the year, it would be unlikely they would have a significant amount of income taxable in that year.

There are exceptions to everything, so the key here is to determine as you get older who would be best to pay taxes on this year's RMD -- the account holder or the beneficiaries? If it's the account holder, take the RMD as early as possible, but if it's the beneficiaries, wait until year-end.

1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Jim Cramer and Stephanie Link reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

Jim Cramer's protégé, David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
Try it NOW
Try it NOW
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

Jim Cramer's protégé, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!

Markets

DOW 17,416.85 +225.48 1.31%
S&P 500 2,021.25 +19.09 0.95%
NASDAQ 4,683.4070 +45.4130 0.98%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs