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There are lots of articles around that speak to what you can and cannot do with your IRA before you reach age 59½, and more that address what you must or must not do with your IRA after you’ve reached age 70½. But what can you do in the interim period? Surprisingly, you have all the control you may wish for.
After you’ve reached age 59½, you are free to take withdrawals from your traditional IRA with no penalties. You will have to pay tax on any withdrawal from the IRA, but otherwise there’s no downside to taking money out of the account.
For a Roth IRA, of course there’s no tax on the withdrawal. You’re free to take as much as you like (or as little) at any time.
Of course, these withdrawals from either type of account, Roth or traditional, will forever remove the funds from the tax-protected status that the funds are allowed while in the IRA accounts, so you’ll want to consider withdrawals carefully.
Once I make a withdrawal, do I need to continue making them? Between the ages of 59½ and 70½, there are no required distributions, and no continuation requirements (as with 72t arrangements). As long as you’re not subject to a 72t restriction, you can take money out one year and take no money out the next, or whatever you like. You’re actually free to make your own decisions about this.
How does this impact Required Minimum Distributions (RMDs)? RMDs, for non-inherited IRAs (meaning, an IRA that is your own, that you didn’t inherit), don’t start until age 70½. So to gauge an impact at this point is a moot exercise, other than to realize that any money you withdraw before the year you reach age 70½ will have the effect of reducing your future RMDs, since the balance will be lower when you have to calculate the required distributions.
So – enjoy the freedom. You can take money out of your IRA without penalty if you wish, or you can leave it alone, between the ages of 59½ and 70½. Of course you still have to abide by all of the investing rules, rollover rules, and other rules that apply to your IRA, but regarding withdrawals, you’re safe to do as you wish during this period. The same freedoms apply to your 401(k), 403(b) or other qualified plan, as long as you’ve left employment or the plan administrator allows in-service withdrawals.
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After briefly reading several of your articles on converting Traditional IRA funds to a Roth IRA, it seems that I may be a perfect candidate as I anticipate being in a higher tax bracket when the RMDs start rolling in. Before I jump into obsessively investigating this further, I want to start with this question: I have a Traditional IRA as a result of being awarded 50% of my husband’s employer-provided 401K in our divorce. Is there anything different about making Traditional to Roth conversions that I should be aware of (i.e. I’m not allowed to do it because it’s NOT my own 401K)? Below are a few facts in case they might potentially influence your answer:
1) I am 64, still working full time and plan to retire in 2 years at my FRA. 2) I am currently in the 15% tax bracket. 3) I rolled the 401K funds into a Vanguard IRA account (current balance approx. $310,000) where I also own a Roth IRA (current balance approx. $26,000). 4) I have my own employer-provided retirement plan (Public Employee Retirement Fund). 5) I don’t anticipate pulling any monthly funds from my Traditional IRA when I retire as my PERF and Social Security will be sufficient enough to maintain my current lifestyle (barring any emergencies).
So, are there restrictions or a different set of rules for me with regard to converting?
Sandra – when you rolled over the QDRO’d 401k money into an IRA in your name, it became your IRA. You are allowed to do whatever you wish (within the law) with that IRA as if you had contributed the money in the traditional fashion, including Roth conversion.
Hope this helps –
jb
You wright, “For a Roth IRA, of course there’s no tax on the withdrawal.”
Most of the time that will be true. But when the ROTH IRA owner is 59 1/2 and you have not owned a ROTH IRA for at least 5 years, While there is no penalty for distributions, Earnings distributed from your ROTH IRA will be taxable as ordinary income.
I often suggest folks get a ROTH IRA early in life to eliminate that 5 year ownership requirement later in life.
Agreed, Clydewolf. Nice catch!
Jim, what about rolling a chunk of the pre-tax IRA or 401-k money to a Roth IRA? Looking from a distance (I’m not there yet!) that if one retires before age 70 and has much lower income, then there is a window of opportunity to pay the tax at a lower rate, while continuing tax-preferential treatment in a Roth, and not have the RMD later, either. Do I have that right or is it not quite so clear as that?
Found your post from last year that discusses this https://financialducksinarow.com/5097/ideal-roth-conversion-candidate-protecting-non-taxation-of-ss-benefits/
Hi Jim –
Yes, that’s a great option to use during the years between 60 & 70, since you can set the amount that you withdraw and control the tax hit. This will help to reduce your RMDs later.
jb