Planning for income in retirement/tax questions

[Mango1956]

DH will likely retire Sept. 1st. We will both be 59 1/2 at that point. We are in the 15% tax bracket. Income (50K per year) will be a combination of:
Pen Fed CD interest
Distributions from taxable Wellington account
tax free cash on hand (from inheritance)
Withdrawl from a traditional IRA

I am trying to massage the income for both tax efficiency and to qualify for a silver plan in Covered Calif (ACA). Re: the trad IRA withdrawl, I called Vanguard to see if they are required to withhold taxes, and they said, no, it's optional, but if they do withhold, the minimum is 10% of the withdrawl. I am thinking it might be wise to have them do this, so that we will avoid having to make quarterly tax payments. Does this seem reasonable?

Secondly, I am trying to find info online about how traditional IRAs are taxed after we reach 59 1/2. Do the cap gains and div distributions suddenly become taxable, or do they continue to be tax differred as long as they are reinvested in the fund? I know if we sell shares in a trad ira, we pay ordinary income taxes on that money, right?

Sorry if these are dumb questions, and thanks in advance for any links for info, personal experience in this area, etc.

 

[kaneohe]

?

Secondly, I am trying to find info online about how traditional IRAs are taxed after we reach 59 1/2. Do the cap gains and div distributions suddenly become taxable, or do they continue to be tax differred as long as they are reinvested in the fund? I know if we sell shares in a trad ira, we pay ordinary income taxes on that money, right?

Only withdrawals from TIRA are taxable (as ord.income). If you leave distributions in TIRA , they continue tax deferred.

 

[Animorph]

Withholding might be a little simpler than making estimated tax payments, but it's not a big deal either way. Withholding enjoys a slight advantage of not causing timing problems. The IRS actually wants your taxes to balance out each quarter. However, if you exclusively use withholding or equal quarterly estimated tax payments you only have to make sure your taxes balance out for the entire year. So either works, but if you have some unexpected taxable event near the end of the year it will be easier to cover with additional withholding. If you have to make a larger year end estimated tax payment to cover the extra tax, you'll probably have to calculate your taxes for each quarter to demonstrate the taxes were paid as due each quarter. That's a bit of a pain, depending on the complexity of your taxes.


As far as your IRA, they behave the same as before you hit 59.5. No taxes for whatever happens within the account. Only withdrawals are taxed, at your regular income tax rate.

 

[Mango1956]

Thank you, kaneohe and Animorph for your responses. The withdrawl phase is certainly different from the accumulation phase, and I need to learn it all. Might meet with a tax person as well to make sure I'm doing everything right.

 

[pb4uski]

You can get a reasonable idea of your 2015 and 2016 taxes by taking a copy of your 2014 return and removing some/all of DH earnings to reflect his retiring, adding in your planned IRA distributions and making any other appropriate adjustments. Or use the What-If Worksheet if you use Turbo Tax.