This month’s AICPA Client Bulletin highlights an interesting topic regarding retirement. In the article Mixing IRA Distributions With Social Security, the concept of crossing plans is evaluated. This is a very strategic move, as many of our clients may benefit this upcoming tax season.
In essence, a 401(K) and employer-sponsored benefit plans are designed to support taxpayers during their retirement years. Many of these individuals plan ahead by making recurring tax-free contributions. This is accomplished when 401(K) participants roll over their money into a traditional IRA, which extends their tax deferral. In order for the tax deferral to take full effect, many taxpayers try to keep their IRAs intact as long as possible, allowing the tax-free build-up to expand.
A significant portion of senior citizens tend to take Social Security early. This allows them to tap into their IRA when needed. This is not always the best option. The value of a tax deferral ultimately depends on your tax bracket. For a traditional taxpayer in the modest 15% tax-bracket, it is not wise to seek this “hold-out” method.
However, there appears to be an upside to this method. The longer you wait to start Social Security, monthly benefits will increase. In addition, surviving spouses are able to receive their descendant’s Social Security payments.
Simply put, the plan to tap into an IRA early and hold out to start Social Security will benefit a select few of our taxpayers. Determining the outcome is based upon many variables, including health and work history. If you find yourself in this situation, our office will be more than happy to assist you in determining a recommended course of action.
Source: “IRA Distributions With Social Security.” AICPA Bulletin Feb. 2014. Print.