This post explains a method that will work for a majority of taxpayers to pay lower or no taxes when you take Ira Distributions.
Everyone must take distributions from their 401k or IRA at age 72. And when you take those distributions, you report them as income on your tax return. But you have control over the tax rate you pay on those distributions by taking them at the right time. Let’s take an example.
Bill and Linda are both retired, have large IRAs, and are age 60. Their taxable income will be $70,000 this year (their gross income is $100,000, taxable income is after all deductions). They expect that income to remain constant. They do not need to take distributions from their IRA for another 12 years, at age 72. But, if they start taking small distributions now, they can pay little or no tax on those distributions.
For 2022, the tax tables extend the 12% tax bracket for married couples filing jointly to $83,550. Since Bill and Linda’s taxable income is only $70,000, they can add $13,550 to their income and still be in the 12% tax bracket. They can withdraw $13,550 from their IRAs and pay only 12% federal tax on that distribution. They can do this annually.
If Bill and Linda wait until age 72 to start their distributions, the mandatory withdrawals would be over $40,000 annually. This would push their taxable income much higher and most of the IRA distribution would be taxed at the next tax bracket, 22%.
The same concept applies to single taxpayers (please consult the tax tables for single taxpayers.)
Another Benefit – Use the Distributions as a Roth Conversion
Since Bill and Linda do not need these early IRA distributions for living expenses, they can take the distribution, pay the 12% tax and convert the distribution to a Roth IRA. The Roth IRA can grow indefinitely as there are no required distributions during the lifetime of the account holder or spousal beneficiary. And when Bill and Linda do decide to take distributions, the distribution is tax-free.
Note that once they begin taking mandatory distributions at age 72, those distributions cannot be converted to a Roth IRA.
The post How to Pay Lower Taxes on IRA Distributions appeared first on Retirement Income.
