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Don't Rush IRA Withdrawals

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senior_woman_coffeeQ: At age 81, can I take as much as I want out of my IRA without penalty?

A: If you are referring specifically to the 10 percent tax penalty associated with early withdrawals from tax-deferred retirement plans, you should have no worries. However, there are other considerations and potential tax consequences to be aware of when planning your IRA withdrawals.

Tax considerations for IRA withdrawals

First the easy part: once you are 59 1/2, you can withdraw as much as you want from an IRA without the 10 percent early withdrawal penalty being applied. So, at age 81 you are well in the clear on this count. However, that doesn't mean there aren't other tax consequences to consider when you make IRA withdrawals.

For one thing, IRA withdrawals are included in your ordinary income, so taking out an unusually large amount could push you into a higher tax bracket. If your IRA is a traditional vs. a Roth IRA, you will have to pay taxes when you take money out of it, and taking a large amount in one year could mean having to pay taxes on that money at a higher rate.

Another factor is that until you take the money out of your IRA, your investment gains can compound from year-to-year without being diminished by taxes. This makes it advantageous to leave money in the IRA for as long as possible.

Managing your required minimum distributions (RMDs)

Assuming again that you have a traditional IRA, once you reach age 70 1/2, you must take some money out of your IRA each year. This is known as a required minimum distribution, or RMD.

The annual RMD amount is generally determined by dividing the market value of your IRA by your remaining life expectancy (though this can be affected by your spouse's age). Each year, you must go through the exercise of calculating your RMD and taking that amount out of the plan during that tax year.

If you take out more than the RMD amount in one year, you don't get to apply that excess toward reducing the RMD in subsequent years. So, taking out more than the RMD can cause you to draw your IRA down faster than necessary. Since there are tax advantages (as described above) to leaving money in an IRA as long as possible, it may be best not to take out more than the RMD amount unless you need the money to live on.

Long-term budgeting

Speaking of what you need to live on, RMD calculations are designed to draw your IRA balance down over time. They are not intended to be a budgeting mechanism to make sure you have enough to live on over the remainder of your life.

So, don't necessarily assume that you should spend the full amount of your RMD each year. It may be wise to put aside some portion of that to make sure you have enough to meet expenses in future years. Long-range planning is always part of retirement budgeting - even at age 81.

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More resources on transferring your IRA

IRA withdrawal rules: transfer to CD without penalty

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