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Veteran Services: Finance Questions

Finances

You're working, and you've got a family that depends on you - both now and down the road. Where do you invest your money? Do you borrow against the equity in your house? Through a preferred provider relationship with USAA, The American Legion can provide expert financial advice to just about any question.

Questions & Answers

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Financial Questions & Answers

Question:

I am 68 and married with joint annual income of $55,000 in retirement annuities and have a large IRA savings. What should I do to limit the tax burden concerning the IRA? – Darwin

Answer:

Our answer might be counterintuitive, but here it is: start pulling money out of your IRA. We’re not talking about a haphazard approach, but rather a well thought out and carefully executed plan geared towards attempting to minimize the tax burden created by your IRA.

Since you have $55,000 of income from your retirement annuities (we’ll assume this includes Social Security), your taxable income (income after deductions and exemptions) is probably around $40,000. You can see where you stood in 2010 by checking line 43 on your Form 1040. If you’re married filing jointly in 2011, you can have taxable income up to $68,000 and still be in the 15 percent tax bracket. So, in the scenario above you could withdraw $28,000 from your IRA and only pay 15 percent federal income tax. While it’s true that you would be voluntarily paying taxes, you would be doing so at what is a historically low rate. You could continue this approach into future years.

If you don’t need the money and are interested in putting it into a tax-free vehicle, you could actually convert the same amount noted above into a Roth IRA. When you reach age 70 ½ and are faced with required minimum distributions, you would only be able to convert distributions above what is required into a Roth.

If you are extremely pessimistic and feel take rates are going to take off, you could adopt a similar approach as noted above, but go to the top of the 25 percent tax bracket ($137,300 in 2011).

This may be an approach you hadn’t thought of, but that makes sense. As with all tax-related questions, consult your tax adviser.