Ira withdrawal after age 59 1/2 but before age 70

[dande36]

Is there a tax advantage or disadvantage to withdrawing money from my IRA before age 70.  I would withdraw it and then re-deposit it into a non retirement account.  We will have a loss from a home sale and I am thinking it might be better to start drawing money from my IRA and then re-depositing it into a non IRA account.  I am 64 and not yet collecting social security.  Our only other income is my husband's social security at this time.  I will start collecting at age 66.  Thanks

[Zbucklyo · Accepted solution]

There may be a slight advantage to not withdrawing the money until later if you have that option.  It is a question of tax rates at the time you withdraw the money, and the time value of the money.  If you withdraw the money now, you pay taxes on it now, at whatever your current marginal tax rate is.  Then, when you put it into a non-retirement account, interest, dividends, and capital gains on that money will be taxed at the appropriate rates each year.  Capital gains are taxed at a lower rate than ordinary income, and dividends often are.  If you leave it in the retirement account, the interest, dividends, and capital gains will accumulate over time, and you don't pay taxes on them as they accumulate - you defer paying taxes on the account balance until you actually withdraw the money.  However, when you withdraw the money, you pay tax at ordinary income rates - not the preferential rates on capital gains and dividends - at your income tax rates at the time.

[dmertz]

Reducing the value of your traditional IRA to reduce future RMDs will reduce your AGI in future years, possibly reducing the marginal tax rate on those future distributions.  If you are considering taking distributions now, there is no reason to convert the money to a Roth IRA rather than put the money from those distributions in a non-retirement account.  Roth IRAs have no RMD requirements and will continue to grow tax free (distributions of earnings will be tax-free 5 years after the first year for which you make a Roth IRA contribution).  In addition, your beneficiaries will continue to be able to stretch distributions over their expected lifetime, allowing the investments in the traditional Roth IRA to continue to grow tax free.  The common suggestion is to convert to Roth an amount each year that just tops out your current tax bracket, particularly if your tax bracket will be the same or higher when you must begin taking RMDs from your tax-deferred retirement accounts.

Be aware that if 85% of your husband's Social Security income is not already being taxed, the increase in income from the IRA distributions can push more of his social Security income to be taxable, multiplying your tax bracket by as much as 85% in determining your marginal tax rate.  You'll need to factor this into your decision whether or not to take distributions from your traditional IRAs now.  You might also consider taking IRA distributions before age 70½ to use for expenses and delaying beginning your Social Security until age 70½.  Modeling the possibilities can be a mind boggling exercise; it can be helpful to use the CD/download version of TurboTax rather than the online version so that you can try different scenarios.