Q: I am retiring and want to roll over my deferred account to an IRA. Which is the best IRA account? And how old do I have to be to withdraw without getting penalized? And what will the tax rate be?”
A: Under current IRS guidelines, you must be at least 59 1/2 years old in order to make a withdrawal from a traditional IRA without being hit with a 10% penalty.
Of course, just because you can start making those IRA withdrawals at age 59 1/2 or older without penalty doesn’t mean that you should start withdrawing your money. Generally speaking, the longer you can wait, the more time you’ll allow your nest egg to grow and the greater your investment savings will be — assuming that your investments are performing well.
Another age requirement with a traditional IRA is that once you turn 70 1/2 years old, you must begin your IRA withdrawals by April 1st of the following year.
In other words, if you don’t start taking IRA withdrawals by the time you hit 59 1/2 – and if you don’t make withdrawals while you are in your 60s – you will be required to do so by April 1st of the year following the year in which you turn 70 1/2.
Different rules apply to ROTH IRAs. You can make withdrawals of your contributions tax free and penalty free at any time. Additionally, you can withdraw your ROTH IRA earnings tax free and penalty free as long as you’ve had the account at least five years.
You asked which IRA is best. I assume you meant which type of of IRA is better: a traditional IRA or a ROTH IRA?
With a traditional IRA, the advantage you get is an upfront tax deduction for your contributions, provided that you qualify — based on your income and other factors. With a Roth IRA, the highlight of these plans are that withdrawals are tax free on the back end — after the accounts have grown due to capital gains. So a lot of people prefer ROTH IRAs because none of knows what our tax bracket and tax rates are going to be in the future. So having a Roth IRA can be especially attractive since you can keep for a long period of time, have it appreciate, and then make tax-free withdrawals whenever you choose to do so.
Now, the caveat of course with the Roth IRA, is that if you’re going to do a rollover or a conversion by taking a lot of your existing retirement money (such as 401(k) funds) and turning that into a Roth IRA, any previously untaxed amount is considered “distributed” to you. Therefore, that amount of the conversion/rollover is counted as part of your gross income, and you’re going to have to pay taxes on those monies. So you have to take into consideration that as well.
Finally, in terms of the tax question you asked about, you wanted to know what will the tax rate be once you start withdrawing money from the IRA. Well, as I mentioned, as long as you put it into the ROTH IRA for five years, then you get to take those contributions out tax free. No taxes there.
However, with the traditional IRA, the tax really depends on your own individual tax bracket. Your withdrawals are taxed at your marginal tax rate. This rate varies based on your income and tax filing status — such as, are you single? Are you a head of a household? Or are you married and filing jointly? All of that matters.
Since I don’t know your specific info, here’s a quick chart that shows you a snapshot of your tax bracket based on your unique household income and filing status.
|Tax Bracket||Single||Married Filing Jointly||Head of Household|
|10% Bracket||$0 – $8,500||$0 – $17,000||$0 – $12,150|
|15% Bracket||$8,500 – $34,500||$17,000 – $69,000||$12,150 – $46,250|
|25% Bracket||$34,500 – $83,600||$69,000 – $139,350||$46,250 – $119,400|
|28% Bracket||$83,600 – $174,400||$139,350 – $212,300||$119,400 – $193,350|
|33% Bracket||$174,400 – $379,150||$212,300 – $379,150||$193,350 – $379,150|
At the very low end, you might be in the 10% tax bracket. And that’s for folks who are single, making up to $8,500 in 2011; or married persons making up to $17,000; or a head of household making a up to $12,150 a year.
Most people are going to fall somewhere in the 15%, 25% or 28% tax brackets.
Or maybe you might even be in the 33% tax bracket if you are at the pre‑retirement phase and are a high income earner. The top tax rate is 35% for those earning $379,150 and above.