Fifty-Nine-and-a-Half

Today I turned 59 ½.  For those of us who have been putting money aside in Individual Retirement Accounts (IRAs) and 401Ks, this is the magic age where we can start taking the money out without penalty! 

Just because I can doesn’t necessarily mean I should.  Or maybe it does.  The encouragement to put money into these tax-deferred accounts is all over the news and on the tips of the tongues of every financial adviser.  As I’ve followed financial news and read the doom-and-gloom predictions that so many of us baby-boomers won’t have enough to retire, I keep hearing “keep working and don’t take money out of these accounts.”

What is conspicuously missing in the financial planning realm is a plan to take the money out of IRAs.  I guess there hasn’t been enough demand for detailed planning on how we take tax-deferred money out, pay the taxes, and do something with the money.  I guess this is supposed to be the easy part. 

The IRS has thought it through.  We get 11 years – from ages 59 ½ to 70 ½ - to take the money out on our own schedules and on our own terms.  After that, we are forced to take Required Minimum Distributions from our IRAs/401Ks.  I don’t know about you, but I want to have a choice of when I take my money and when I pay taxes on it.  The clock is ticking…

We were also told when we started putting money in tax-deferred retirement accounts was that we’d likely be in a lower tax bracket by the time we start taking the money out.  This may be true for some, but for others – probably lots of others – it’s not true at all.  We’re not in a lower tax bracket.  Why would we even want to be in a lower tax bracket?  That means less money.  I think most of us, if we are really honest with ourselves, would prefer to stay in the same tax bracket as before we retired. 

So here’s the deal.  I want to start taking money out of my IRA/401K on an annual basis.  I don’t want to take out enough to put us in a higher tax bracket, and I don’t really need to use the money right now. 

For me, the solution lies in the deal the government gave us in 1997 – the Roth IRA.  Named after Senator William Roth, Jr. from Delaware and part of the Taxpayer Relief Act of 1997, the Roth IRA allows you to contribute after-tax money into an account where it grows tax-free.  There are limits on new money contributions, but anyone can convert traditional IRA money into Roth IRA money.  All we have to do is pay the taxes on it.  Oh, and report it to the IRS correctly.

I’ll be finding out how to do this in the next couple of days.  Keep tuned.