How To Do IRA Distributions In A Tax Efficient Way

We have noticed there is a need for some tax planning in this area.  Taxpayers who have retirement accounts in the range of $500K or larger often have their own investment advisor.  The advisor normally but not always will advise them on how to best take their distributions.

The problem is with taxpayers with smaller IRA accounts, normally in the $100-250K range.  They do not have their own investment advisor, and do not realize they may have a brewing problem.  Here are 2 examples that demonstrate the problem:

1) I have a client who is over 65, single, and his only income is social security of $2,000 per month.  He has an IRA with a balance of $125K.  He does not have to take RMDs (required minimum distributions) because he is under 73.  His taxable income is zero, and he does not pay any income tax.  If he dies this year, then his children will inherit the account, and likely have to take the money out within 5 years and pay tax rate of either 22 or 24% on this money.  We could take an IRA distribution of $20K this year and pay zero tax on it.  Alternatively, we could fully convert this $20K to a Roth IRA and pay zero tax on it.  After 5 or 6 years, the entire account would be in a Roth IRA and he nor his beneficiaries would ever pay tax on it.

2)    I have a married couple who are in their late 60’s.  Their income is social security and a pension, and their taxable income is $70K.  This means they are in the 12% tax bracket.  We could take another $17K from the IRA account, and only pay 12% tax on this additional $17K per year.  Of course, we could also do a Roth conversion on this same money.  If one of them suddenly dies, then the surviving spouse will likely suddenly be in the 22% bracket.  Would it make sense for us to maximize the income taxed at 12%?

If you would like to discuss this, just call or go to our website, and schedule a consult.  We can model your income and various scenarios in software and advise you how to most efficiently take distributions from your IRA account.