How Much Can I Withdraw from Trad IRA and Pay No Income Tax?

[kelso]

Hi - I'm retired for three years, single, 62 years old. I have most of my retirement money in two mutual fund accounts: an "individual" non-taxable account (let's call it A1) and a "traditional IRA" account, A2. I have been withdrawing my living expenses from A1.

Since I have so little income (tiny annuity, capital gains), I have been paying zero income tax since retirement.

For a number of reasons, I want to transfer money from my (so-far untouched) A2 to A1. And I'm willing to do this once per year over several years. I realize that when I do this the money withdrawn from A2 is subject to income tax.

My question is, how can I determine (or estimate), for a single year, the maximum amount I can transfer from A2 to A1 and still pay no income tax?

Thanks for any answers and insight.

 

[REWahoo]

The best way to figure out this sort of tax question is to get yourself a copy of TurboTax or similar tax software and run some "what if" scenarios. Only you have the knowledge to plug in all the details of your finances to get a realistic estimate of what you can transfer - the best those of us here can do is guess and pontificate...and we're pros at that!

 

[walkinwood]

I agree with REWahoo. You may not even need to get a copy - your situation may be simple enough to use one of the free online tax programs.

Or, get a form 1040 for 2010 and put it in a spreadsheet.

The deductions, credits & exemptions are all inter-connected, so it is hard to generalize.

 

[arebelspy]

And if you don't need the money, consider figuring out how much you can roll over into a Roth tax-free, so you can withdraw it all later tax free whenever you want.

 

[LOL!]

Taxcaster can help you decide. It's an tax calculator that is online and simple to you.

Do you know what a Roth IRA is? Do you think you should be converting your traditional IRA to a Roth IRA while in a low or zero tax bracket? Many folks on the forum do exactly that.

 

[Animorph]

There is no 0% tax bracket, 10% is the lowest and applies to income up to $8,500 for single or $17,000 joint. There is a 0% capital gains rate that applies to the 10% and 15% income tax brackets, but that doesn't seem to apply in this case. So you will have to depend on exemptions and deductions and credits to keep your tax to $0.

These lower rates are in effect through 2012. After that tax rates are scheduled to rise. Total guess what'll happen then, though I would hope income taxes at this level would not rise. Capital gains taxes might not stay at 0% though.

 

[LOL!]

Semantics. Semantics.

 

[Lsbcal]

Hi - I'm retired for three years, single, 62 years old. I have most of my retirement money in two mutual fund accounts: an "individual" non-taxable account (let's call it A1) and a "traditional IRA" account, A2. I have been withdrawing my living expenses from A1.

Since I have so little income (tiny annuity, capital gains), I have been paying zero income tax since retirement.
...

It's nice to pay zero income tax but what about some years from now? Suppose you have Social Security and you're taking IRA distributions. The tax bracket creep can be more painful.

You might consider taking some IRA money out and converting it to a Roth. The Roth money can then accumulate tax free and it's a then a source of money to blend with your other income streams. Then there are required distributions that you will hit in the 70's.

Somethings to think about.

 

[kaneohe]

Reference Room

The 2011 exemption is 3700 and the std deduction for singles is 5800 so
if those numbers apply to you, you can have 9500 in ordinary income AGI and have 0 taxable income and 0 tax. You can also have additional LTCG /QDIV (at least for next 2 yrs) as long as you stay with taxable income within the 15% bracket (<= 34500 for 2011)......so 9500 ordinary income and LTCG/QIV of 34500 should produce 0 tax. For a real life situtation w/ other income, suggest, as others have already mentoned, using Taxcaster to estimate taxes
google "Taxcaster" to find it here TurboTax® TaxCaster - Free Tax Calculator - Free Tax Estimator (This is for 2010 but should be close enough for an estimate)

btw: not sure what you mean by a non-taxable account but it's usually called
a taxable account, I think.

 

[kelso]

Thanks to all for thoughtful responses. The Taxcaster was just what I was looking for for a quick what-if. Now I'm working on a limited 1040 spread sheet to get more detailed.

So it looks like I can withdraw about $10k from my traditional IRA before I incur income tax. Great, just what I wanted to know. Now the other idea from some of you is to take this tax free withdrawal and convert to a Roth (I actually have a small Roth now, not mentioned in my OP). Doing this would allow the gains on these funds to be non taxable as well. Have I got that right?

Also, it seems worthwhile to consider withdrawing even more from the traditional IRA now at 10% rather than later when I may be in a higher bracket.

kaneohe - "btw: not sure what you mean by a non-taxable account but it's usually called a taxable account, I think." - The A1 account is an "individual" account, just my personal savings from taxed income. So there is no tax (other than dividends and capital gains) when I withdraw from it. I'm under the impression that that makes this a "non-taxable" account, as opposed to a traditional IRA account, which is "taxable" when I withdraw from it. If this isn't right, please explain. Thanks.

 

[kaneohe]

So it looks like I can withdraw about $10k from my traditional IRA before I incur income tax. Great, just what I wanted to know. Now the other idea from some of you is to take this tax free withdrawal and convert to a Roth (I actually have a small Roth now, not mentioned in my OP). Doing this would allow the gains on these funds to be non taxable as well. Have I got that right?

Also, it seems worthwhile to consider withdrawing even more from the traditional IRA now at 10% rather than later when I may be in a higher bracket.

kaneohe - "btw: not sure what you mean by a non-taxable account but it's usually called a taxable account, I think." - The A1 account is an "individual" account, just my personal savings from taxed income. So there is no tax (other than dividends and capital gains) when I withdraw from it. I'm under the impression that that makes this a "non-taxable" account, as opposed to a traditional IRA account, which is "taxable" when I withdraw from it. If this isn't right, please explain. Thanks.

The suggestion to do Roth conversions is an excellent one since you have to pay the same taxes for the conversion as you would to simply withdraw from your TIRA. The added benefit would be that the earning from the Roth come out tax free.......PROVIDED you are over 59.5 y.o which you are and that your first Roth is at least 5 yrs old. If your first Roth ever opened is < 5 yrs old: you will owe taxes on any earnings withdrawn as
shown from this table by KAWill from the fairmark.com forum. Withdrawals from the Roth are considered to be contributions first, then
conversions, and finally earnings so you should probably be ok if you are careful.

OVER AGE 59.5
LESS THAN FIVE YEARS SINCE OPENING FIRST ROTH IRA

Contributions: Tax-No; Penalty-No
Conversions: Tax-No; Penalty-No
Earnings: Tax-Yes ; Penalty-No

Withdrawing more to convert sounds like a good idea provided you do it at a lower tax bracket now than you would pay to simply withdraw in the future. Use Taxcaster to help.

Re: the labels......I'm more used to seeing
1) tax deferred for TIRAs....traditional IRAs
2) tax exempt for muni bonds
3) taxable for "regular" "personal" accounts that are not tax-favored
retirement accounts.

I'm guessing the labels apply to how the earnings in each account are taxed (not the contributions). Using the standard lingo would help to avoid misunderstandings when you ask questions but it is often useful to ramble on a bit so folks can read between the lines and understand your question even if you use the "non-standard" label of if you are leaving out important relevant factors.