Having your own tax-deferred retirement account is a bit
like having one of those self-titrating morphine buttons that hospitals use:
Press it whenever you need quick relief. But once you're retired and able to
tap your 401(k) or individual retirement account (IRA), it's not easy to
titrate your own doses of cash. Withdraw too much, and you use up your nest egg
too quickly; too little, and you might unnecessarily crimp your retirement
lifestyle.
Overlaying the how-much-is-enough question are several finer
points of tax planning. Because you can decide how much money to pull out of a
401(k) or individual retirement account, and because those withdrawals are
added to your taxable income, there are strategies that can help or hurt your
bottom line. That's especially true for early retirees trying to decide when to
start Social Security, how to pay for health care and more. Here are some
money-saving withdrawal tips.
CURB TAXABLE INCOME
If you are buying your own health insurance via
the Obamacare exchanges, keep your taxable income low to qualify for big
subsidies.
Here's an example using national averages from the
calculator on the Kaiser Family Foundation web page. Two 62-year-old spouses
with annual taxable income of $62,000 would receive a subsidy of $8,677 a year,
against a national average premium of $14,567. If they took another $1,000 out
of their tax-deferred account and raised their taxable income to $63,000, they
would be disqualified from receiving a subsidy.
Not every case may be that dramatic, but it's worth checking
the income limits and available subsidies in your own state.
DELAY BENEFITS
If you retired early, consider taking out extra money to
live on and delaying Social Security benefits until you are older. Withdrawing
money from retirement savings hurts. You not only lose the savings, you lose
future earnings on those savings. And in most cases, you have to pay
income taxes on withdrawals from those tax-deferred accounts.
But Social Security benefits go up roughly 8 percent a year
for every year you don't claim them. And even after you claim them, they rise
with the cost of living and are guaranteed for life. When you draw down your
own savings to protect a bigger Social Security payment, tell yourself you are
buying the cheapest and best annuity you can get.
PLAN IN ADVANCE
Plan ahead for mandatory withdrawals. In the year you turn
70 1/2, you have to begin drawing down your tax-deferred IRAs and 401(k)
accounts and paying income taxes on those withdrawals. Unless you expect to be
in the lowest tax bracket at the time, it makes sense to start withdrawing at
least enough every year before then to "use up" the lower tax
brackets.
For single people in 2014, you're in a 10 or 15 percent
marginal tax bracket until you make more than $36,000 a year. For married
people filing jointly, that 15 percent bracket goes up to $73,800. It's a lot
better to pull out that money in your 60s and use up other savings to live on,
than it is to save it all until you are 70 and then withdraw large chunks at
higher interest rates.
GET A GOOD ACCOUNTANT
You may want to use early years of retirement to take the
tax hit required to move money from a traditional IRA into a Roth IRA that will
free you of future taxes on that money and its earnings. You may pull a
lot of money out of your account in one year and spend it over two or three
years, to keep yourself qualified for subsidies in most years.
You may titrate your withdrawals to keep your Medicare
premiums (also income linked) as low as possible. The best way to optimize it
all? Get an adviser or accountant who is comfortable with a spreadsheet and can
pull all of these different considerations together.
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