For retirees, the years between ages 59 1/2 and 70 1/2 provide a window for tax shelter:
* After 59 1/2, you can take money from your IRA and other tax-deferred retirement accounts without paying a 10 percent penalty.
* Before 70 1/2, there are no minimum required distributions (MRD) from these accounts. Subsequently, failure to withdraw the required amounts would result in a 50 percent penalty.
During those in-between years, you should take sufficient withdrawals from your IRA to fully use the 15 percent tax bracket. In 2005, that bracket is up to $29,700 in taxable income, or $59,400, for couples filing a joint return.
Suppose, for example, you and your spouse are both 65 years old. Filing jointly, you expect your taxable income to be around $40,000 this year. If so, you can take a total of approximately $19,400 from your IRAs by year-end.
Such withdrawals will be taxed, but only at 15 percent: adding $19,400 to your other $40,000 in taxable income will put you at $59,400 in taxable income, the upper limit of the 15 percent bracket. However, if you don’t shrink your IRAs in this manner, these accounts may continue to grow and your MRDs after age 70 1/2 may push you into a higher tax bracket.
