Best IRA Withdrawal Strategy

Reader Question:  I am 64 and retired and will need to use some of my savings to live on for the next 5 years as I want to delay collecting Social Security.  I will need about 3,000/month.  Which would be the better financial solution: Would it be better to sell some stocks (all pay dividends) in my taxable account, which would mean large capital gains and loss of dividend income or withdraw money from my IRA, which would be taxed as ordinary income?  My husband has a pension and Social Security totaling $40,000/year but we have no other income.

Answer:  A lot of people ponder the best strategy for getting cash flow in retirement.  You don’t mention if you have substantial income tax deductions such as mortgage interest or charitable contributions so I’ll assume ‘no’ to both.  Based on your facts, it appears that withdrawals from your IRA will be taxed at 15% for federal income tax purposes (up to $74,900 taxable income).  It also appears that there will be no taxes on selling your stocks (within limits).  My partner, Kimberly Reynolds, CFP®, clarified, “This is because the tax rate for long-term capital gains is 0% for joint tax filers with taxable income of less than $74,900 ($37,450 for single filers)”.  So if you are trying to minimize current taxes, selling stocks appears to be the way to go.

The income tax laws are very complicated.  I’d recommend doing a trial 2015 tax return and run a few “what-if’s”.  In many cases we find it makes sense to take withdrawals from your IRA early (and pay some taxes) if as long as you can withdraw the funds in a low tax bracket.  If you don’t need the money, converting to a Roth IRA is worth considering.  Best advice: work with your CPA or financial advisor before making a final decision.

Reader Question:  I have homeowners insurance and an umbrella policy. Recently I inherited timber and pasture land in Arkansas that I put in a family trust. I am not interested in selling this land. I want to avoid any unexpected liability which might occur. About fifteen years ago I had a similar situation living in Arkansas and owning land in Texas. I was unable to get insurance in either Texas or Arkansas for the Texas land and was also refused an umbrella policy in either state. I solved that problem by selling the Texas land. What is the best way to solve this current AR/AL insurance situation?

Answer:  According to Certified Insurance Counselor, Bubba Bates, several things complicate getting liability insurance in the situation you describe.

  • Property held in a trust is difficult particularly if there are multiple owners within the trust.  If it’s held in an individual’s name you can usually get coverage as an extension of your homeowner’s policy.
  • Property owned out of state is more difficult.
  • Property with vacant structures or ‘attractive nuisances’ such as a pond are difficult to insure.

Bates suggests two possible solutions if your agent is unable to extend your homeowner’s insurance to include this property.  Contact an agent with access to a ‘surplus lines’ broker.  These brokers specialize in underwriting difficult situations.  Another option would be to contact an insurance agent in Arkansas whose office is near the area where the land is located.

Reader Question:  I will be 70 in April this year.  I currently have a SEP plan for myself, a sole proprietor, and my three employees, ages, 40, 52 and 34.  Can I continue contributions for my employees and me for the 2015 tax year or do I have to terminate the plan altogether?  When will RMD’s apply for me?

Answer:  According to my colleague, Foster Hyde, CFP ®, “As long as you are actively working, your company may make SEP contributions for you and your employees.  Because you turn 70 ½ this year, you’ll need to take a Required Minimum Distribution either by December 31st of this year or by April 1st of 2016.  If you wait until 2016, you have to take two distributions in that year (your 2015 RMD plus your 2016 RMD).”