Asset Optimization Blog - Ken W. Stone
Are you missing out on Tax-Free income from your IRA?
In Asset Optimization Case Studies by Ken Stone (September 28, 2008 3:18 am)
A strange question, isn’t it? After all, you’re supposed to be taxed (as income) for money you withdraw from your IRA (or other qualified retirement account).
I was talking with a client last week about their financial situation. They’re old enough so they’re forced to take the required minimum distribution from their IRA. From the comments of this individual, they were advised (by their CPA) to hold off on distributions to save on taxes.
Little did they know they were compounding their tax liability by waiting!
Here’s the bottom line: These folks had a mortgage they wanted to pay off as quick as possible. You can read more about how fruitless (financially speaking) this pursuit is in my mortgage accelerator blog. So they had a ten year mortgage (effectively reducing the mortgage interest deductions substantially each year by paying less interest). Which has caused their tax liability to increase. The IRA distributions were being taxed as ordinary income (as they should be). But by reducing their mortgage, they gave up a valuable tax deduction that could otherwise have been offsetting ordinary income (a dollar of interest expense that is deductible offsets a dollar of income where income tax is otherwise owed).
With a couple of simple adjustments I was able to help them reduce their annual tax liability, improve month-to-month cash flow, increase their savings rate (as a % of income), and keep them on track with their other financial goals.
One of the neat outcomes? Tax-Free income from their IRA!
To your optimized financial health!
Ken
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