My Retirement Withdrawal Strategy

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When I turned 59-1/2 one year ago, I started taking small distributions from my IRA. Once you hit that age, you don’t have to worry about the 10% early distribution penalty. The investment firm that holds the account must have noticed because they have been asking me to contact them about creating a distribution plan. They are concerned that I will overpay in taxes if there isn’t a distribution plan. I wanted to wait until I completed my 2022 tax return to see how my initial distributions impacted my taxes. Because I have no earned income, the money I receive from my IRA gets added to my investment income for tax purposes. This year the standard deduction is $12,950 for single filers. As long as my investment income and distributions don’t exceed that amount, I won’t have to pay any income tax.

This past weekend I completed my taxes, and my income came in under the standard deduction. I thought it might go over, but after deducting stock losses, non-dividend, and tax-exempt distributions, I was safely under the standard deduction. I won’t have to take a required minimum distribution until I’m age 75. Obviously, I don’t want to wait that long, so I started taking a small amount now. Nowhere near the 4% that some distribution plans recommend. I still want to see the tax deferred IRA keep growing. By taking less than what the account is gaining in interest each month, I am allowing the account to increase in value. I would describe my plan as a Dynamic Bucket Strategy. I can adjust the amount of the distribution as needed and use money from non-IRA accounts to allow the IRA to keep growing.

Sometime before June 2023, I will need to pay off the remaining $15,000 on my adjustable-rate mortgage. This will have to come out of a non-IRA account. Not having to pay mortgage interest will save me at least $700 a year. If I put that amount into a treasury fund at 4.2% it would only return $630 in interest. So, it is worth it, despite the fact that the money will no longer be available to invest, and I still need to pay annual property taxes. After that, I plan to wait another five years before I apply for social security. If investment returns are similar to this past year, social security will put me over the $25,000 threshold for federal taxes. I could stop taking IRA distributions at that point and wait 10 years until the minimum distribution requirement starts. You can minimize the amount of tax you have to pay for a while, but eventually they will get their share.

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