Taking a RMD When Not Required

When Paying Taxes Makes Sense

If you have sufficient income from other souces and do not need to take an RMD from your IRA, nor are you required to, it may make sense to take a distribution anyway.

It is important to consider and plan for your probable tax bracket now and in future years.  Your goal should be to try to minimize your income in the years that you are in a high tax bracket and increase your taxable income to "fill up" the income limits in the years that you are in a low tax bracket.  Here are two examples to illustrate:

Example #1:
Assume that you retire at the age of 62.  You are not required to take an RMD from your traditional IRA until you turn 70 1/2.  In the meantime, you will probably have less taxable income so you could do Roth conversions each year to "fill up" the 15 percent tax bracket.   It is important to wait until late in the year, and accurately estimate your taxable income for the year.  If you are fairly certain that you can accurately estimate the "room" left 15 percent bracket, take an RMD for that amount.

Example #2:
Assume a married couple, filing a joint return for 2008 had $45,000 of taxable income.  The top of the 15 percent bracket was $65,100 in 2008, so the couple could have converted $20,100 of their traditional IRA (assuming they made no after-tax contributions) to a Roth and would have paid only 15 percent on the entire conversion amount.  Another way to use up the 15 percent bracket would be to sell saving bonds that have a large maoutn of build up interest.

If your tax bracket is low, you can do an IRA rollover to a Roth IRA.  You may have to pay tax on the distribution, but once the money is in the Roth, you will never have to pay income taxes on the interest or the gains that money earns.

There are two benefits to voluntarily taking an IRA distribution.  First, the taxes you will pay will be negligible, assuming that you do this only if you are in a low tax bracket.  Second, taking the distribution no lowers the amount you have in the IRA at age 70 1/2, when you are required to take an RMD.