Required IRA Withdrawals After Age 70 1/2

The government offers a choice of withdrawing all your IRA savings or receiving smaller payments after age 70 1/2.

Q: When I retired a few years ago, I moved my 401(k) into an IRA. Now that I am 70, I got a letter stating that I need to make withdrawals from the account, and giving me options of Life Income Certain payments or Fixed Period payments.

I don’t know what is the best option for me. Can you give me some advice? My husband and I have sufficient income (at least for now) from Social Security, his VA disability, and my company retirement. We do have mortgage payments to make (for years to come) on a seriously underwater home that we can’t refinance because it is so far upside down.

So it looks like my question is, should I do one of the monthly payment plans (and if so, which is the better option), or should I try to cash out all of the money and pay down the mortgage and refinance to a lower fixed interest rate?

A: We don’t think it would be in your best interest to withdraw all of your money from the IRA unless you have talked to a financial advisor in advance. You have enough income to manage your expenses right now. And, in today’s economy, that’s a good thing. May seniors would love to be in that position.

Here’s what you have to think through: While you didn’t tell us how much money is in the IRA, taking out all of the money now may cause you to pay an increased amount in federal and state income taxes and affect you in other ways when it comes to your tax return.

You are required to withdraw money from an IRA when you turn 69½. An IRA is meant for your use during retirement and the government, which has allowed your cash to grow tax-free wants to get paid rather than see that money as a nest egg for your children or for the next generation.

The federal government gives you a choice when it comes to taking the money out at age 70½ or later. You can take all of the money out at once or you can take it out over time. There are formulas that you can use to make sure you take out those minimum required distributions. Let’s say your required minimum distribution is $100 per month. You could choose instead to take out $500 per month to take care of some of your expenses.

Certainly, by taking out $500 per month, your retirement money will last you a shorter period time, but you’d satisfy the required minimum distribution. You could also decide to take a single withdrawal of $1,200, which would also satisfy your required minimum distribution. The company holding your IRA can usually help you out in determining which method might work best for you.

You could take a single large withdrawal from your IRA and use it to pay down the debt on your home. That would allow you to trade in a higher interest rate mortgage for one at a much lower rate. Of course, then you’d have a large amount of tax to pay, so you’d have to work through the numbers to see the benefit in taking out the IRA money, paying tax on that money, paying for a refinance, and then figuring out what your true net benefit would be.

As we approach the end of the year, you might consider taking out some of the IRA money this year and another sum early next year to minimize the impact on your tax bill. By spreading out the withdrawals over two years, you should lessen the tax impact.

Finally, you should think about whether you want to put more money into your underwater home. Given the choices you have as you enter your retirement years, you must review your financial situation along with your housing situation. It may not make sense to spend $10,000 in taxes to put down another $50,000 on your home to save $100 per month on your mortgage.

Before you make that kind of move, sit down with someone you trust to go over your financial picture and make decisions not only for today but also for the years to come.


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