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Should I close my IRA once I reach retirement age?

Q: Now that I'm over the age of 59 1/2, can close my IRA and simply keep the proceeds in a money market account at the same bank for easy access?

A: Being older than 59 1/2 means that you can close out your IRA without incurring the 10 percent tax penalty on early withdrawals, but there are other reasons why it might not be to your advantage to close out your IRA just yet.

Tax impacts of withdrawing from IRA retirement savings

Even though you are old enough to avoid that 10 percent tax penalty, there still may be some tax disadvantages to taking all the money out of your IRA now. Whether or not you transfer the money to an account at the same or a different bank, once it comes out of the IRA, the tax implications kick in.

First of all, if it is a traditional IRA then the money in it becomes subject to ordinary income tax as soon as you withdraw it. What you need to consider in that case is whether drawing the money out all in one lump sum will kick you up into a higher tax bracket this year. You may pay less taxes in the long run by stretching withdrawals out over several years, to keep you in a lower tax bracket.

Even if the account is in a Roth IRA and withdrawals are therefore not taxable, until you withdraw that money, you are still benefiting from having your investments within the IRA compound tax free until you take them out. Why give up that advantage any earlier than you need to?

Investment considerations for retirement savings

Besides the tax implications of taking money out of an IRA, there are investment considerations to think about when managing your money in retirement. It is noteworthy that you mentioned putting your IRA assets into a money market account. This raises the question of whether you really should have all your retirement savings in a relatively low-yielding, short-term vehicle.

According to the U.S. Social Security Administration, once you reach age 60, the average remaining life expectancy is nearly 22 years if you are a man, and 25 years if you are a woman. From a retirement planning standpoint, you should shoot for preserving your assets for even longer periods to reduce your chances of outliving your money.

The point is inflation can take quite a toll over such long periods of time, so it behooves you to keep some of your money in growth investments even after you retire. Certainly, as your liquidity needs draw closer, it makes sense to have more of your money in short-term vehicles like money market accounts, but it may be premature to invest all of your money that way.

Planning how to spend down retirement assets is every bit as important as the planning that went into building those assets up. Deciding when and how to give up the tax advantages of an IRA and how to invest your money until it is needed should be part of that long-term plan.

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