When you retire at 59.5 years of age or older with an individual retirement arrangement in place, you will have to decide what to do with the IRA. You have two basic options that apply to all types of IRA accounts. If yours is a tax-deferred traditional, SEP or SIMPLE IRA, you have an additional option.
Leave It Alone
Your first basic option with any IRA is to leave the money in the account. If you don’t need to take money out of your IRA because you are getting enough retirement income from work or other sources, your account will continue to accumulate earnings that won’t be taxed while they remain in the IRA. In the case of tax-deferred IRAs, you must start taking taxable required minimum distributions when you reach 70 1/2 years of age. You figure your required distribution by dividing the account balance by your life expectancy as figured in IRS longevity tables. If yours is a Roth IRA, you can leave the money in the account to accumulate tax-free earnings for as long as you live.
If you continue to work, you can continue to contribute to a tax-deferred IRA until age 70 1/2 years. As of 2012, you can keep on adding $5,000 in tax deductible contributions per year. If you reached retirement age at 66 but kept on working, you could add another $20,000 to your tax-deferred IRA by the time you reach 70 1/2 years. With a Roth IRA, you can contribute $5,000 per year of after-tax earnings from work to your account for as long as you live.
Take the Money
Your other basic option is to take the money and use it for living expenses in retirement. You can take your distribution as a lump sum, take varying amounts as you need the money or set up a series of equal periodic payments over your remaining life expectancy. If you take retirement distributions from any type of tax-deferred IRA, you will owe income tax on the money you withdraw in the year you take it out. The withdrawal will be taxed at your ordinary-income rate, not the lower capital gains rate. If you take retirement distributions from a Roth IRA, you won’t owe any income taxes on the withdrawn amount. But the money you take out of any IRA will cease generating earnings for you, and each distribution reduces the size of your retirement nest egg.
Convert to Roth
If yours is any type of tax-deferred IRA, you can convert it to a Roth IRA. You will pay income taxes on the amount you convert, but there are some Roth features that may make paying the taxes on the conversion worthwhile. If you don’t need the money from your IRA to live on, you will avoid having to take required minimum distributions at age 70 1/2 if you convert to a Roth. You won’t have to take anything from the Roth account for as long as you live, but your heirs will be required to take out the money. If you convert to a Roth, you can leave your heirs a tax-free legacy. Beneficiaries who inherit a traditional IRA will owe income taxes on their legacy while those who inherit a Roth IRA won’t.
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