Are You in the IRA Sweet Spot?
By Sarah Brenner, JD
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If you have an IRA, you need to know about the “sweet spot.” What is the IRA sweet spot? Well, that is when you are between ages 59½ and 70½.
Your Sweet Spot
What makes this spot sweet? This is the time when you have the most flexibility with your IRA. When you reach age 59½, the 10% early distribution penalty becomes history. You can take distributions from your IRA for any reason at all and not worry about a penalty. You will still have to pay taxes unless your withdrawal contains after-tax funds, which is rare, but the early distribution penalty is never an issue.
On the flip side, you are not required to take any money from your IRA if you do neither want nor need it. Once you reach age 70½, this will no longer be the case. At that time, required minimum distributions (RMDs) must begin. You will have to take money out of your IRA (and pay taxes on it) even if you do not want or need it. The RMD rules will require you to withdraw a specific amount each year. You can take more, but you can never take less. If you do, you will be hit with a 50% penalty on the amount not taken.
How to Take Advantage
When you are in the IRA sweet spot, take advantage of it! Now, might be the time to take penalty-free distributions from your IRA if you need the money. You no longer have to worry about the early distribution penalty.
You might also consider doing planning now to reduce taxes in the future. With tax reform, tax rates are at historic lows. It may make sense to take IRA distributions now to take advantage of the low rates, because no one knows what the future rates will be when your RMDs are required. When you are in the sweet spot, you can take your money out of your IRA on your own schedule and not the government’s.
The sweet spot is also a great time to consider a Roth IRA conversion. You can convert your IRA now at today’s low tax rates and eliminate any future worries about RMDs. That’s because you are not required to take RMDs from your Roth IRA during your lifetime. You would not need to be concerned with the yearly hassle of being sure your RMD was taken and what the tax consequences would be. With a Roth IRA conversion, there is a tax bill, but this is a one-time event; the trade-off is tax-free earnings for you and your beneficiaries.
To learn how you can take advantage of the IRA sweet spot, your best bet is to consult a knowledgeable tax or financial advisor. Everyone’s situation is different. Don’t let this opportunity go to waste!