Ways to reduce income tax when you began making IRA withdrawals?
Any ideas to save on income tax before one has to start making withdrawals from IRA?
I thought one way would be if you're 67 years old and you know you will have major medical expenses in these next 2 years, should you withdraw some out of your IRA since you will be able to deduct the medical expenses from your taxes? Otherwise, if you wait till 70 1/2, then you will not have the deduction benefit.
Any other ways to save income tax when you start making IRA withdrawals?
Give it away.
That is about the only way to reduce taxes on IRA income.
1it's all normal income once you start withdrawing, nothing you can do to change that
2why do you think at waiting till 70 1/2 that you will not have the deduction benefit? If you have medical expenses, it doesn't matter what age you are, they are still deductible on Schedule A – Itemized Deductions – Line 1, and they have to exceed 7.5% of AGI. You also don't have to wait until age 70 1/2 to start taking IRA withhdrawal. You could basically start at 59 1/2 without paying additional 10% penalty. Also, anytime you take distribution from IRA it's taxable income. So if you took money from IRA at age 67 it's still taxable income.
Just to let you know though, for tax years beginning in 2006 & 2007 an individual may have up to $100,000 per year of your IRA balance distributed to a charitable organization without recognizing income on the distribution. You don't get a charitable contribution deduction though for the amount. But that is one way to get rid of some of the money in your IRA without paying taxes on it.
3You are sort of on the right track, but the real object is to take withdrawals in a lower tax bracket, if possible. If the itemized medical deductions will put you in a lower bracket, you could withdraw or convert to ROTH an amount that would still keep you in that lower bracket.
4Also, with or without the deductions, make a forecast of your tax bracket at 70 1/2 with RMD's. If the RMD's will put you in a higher bracket, consider taking some out now and paying tax at the lower bracket.
Converting the same amount to a Roth IRA would offer the same tax benefit (allowing you to offset it with medical expense deductions) and would make the future earnings tax-free.
5Medical expense deductions don't stop just because you turn 70-1/2. That's the age at which you are REQUIRED to withdraw a certain amount each year from a traditional IRA, but it doesn't affect whether or not you itemize. But you are correct that taking money out in a year when your have additional deductions would result in less taxes for that year. If you had other taxable income for that year though, it wouldn't save anything in the long run since you'd get the deduction either way.
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