Q: If you have an IRA but need the money now, is it best to wait until you are required to take distributions or start a little early? I am 65 years old.
A: Fortunately, IRAs are designed to give you precisely this kind of flexibility. However, that flexibility means you are responsible for managing your IRA distributions effectively.
The following assumes you are talking about a traditional IRA, since you referred to eventually being required to take distributions. (Roth IRAs don't have minimum distribution requirements.)
Traditional IRAs, on the other hand, require their owners to start taking distributions once they reach age 70 1/2. That represents the latest you can start taking distributions, but traditional IRAs allow distributions without tax penalties once their owners reach age 59 1/2. So, since you are between those two ages, you have the option of choosing when to start taking distributions.
The IRS has various tables that dictate the minimum distribution requirements that start at age 70 1/2, and while these vary according to the particular situation, they are generally based on stretching those distributions out over your remaining lifespan.
Even if you start taking distributions before age 70 1/2, you would do well to take a cue from the IRS and plan distributions to last over your expected lifespan. This requires adjusting these planned distributions each year, as both the value of your IRA and your expected lifespan may change over time.
This approach will allow you to start distributions before required, but help you avoid taking out too much too soon. Any distributions you take before you are required cannot be counted toward the required distributions you will have to take later.
Besides helping stretch your money over your retirement, carefully planning IRA distributions helps you manage your asset allocation accordingly. As distributions approach, make sure that part of the IRA is in money market accounts, savings accounts or other similarly liquid vehicles so you do not have to interfere with long-term investments on short notice.
Finally, note that when people talk about IRA distributions without penalty, they are referring to the 10 percent penalty that is typically levied on distributions made before the age of 59 1/2. However, all traditional IRA distributions are subject to ordinary income tax, since they were deductible from income tax on the way in. In fact, that is what the minimum distribution requirement is all about -- it seeks to make sure that people pay tax on this money at some point during their lifetimes.
So, when contemplating what size distributions to take, consider what impact taxes will have on those distributions, and conversely, what impact those distributions may have on your tax liability.
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