Retirement withdrawal shifts tax bracket

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Dear Dr. Don,
If I take $100,000 out of an IRA, what taxes would be owed? We are in the 15 percent tax bracket. Would it be better to do this in 2010 or 2011? We were going to put it in an asset protection trust with an elder lawyer. What do you advise?
— Marilyn Marginal

Dear Marilyn,
Assuming the account holder is older than 59½, there won’t be an early distribution penalty. You’ll owe ordinary federal income taxes on the distribution out of the account. State and local income taxation will depend on where you reside.

If you take $100,000 out of your IRA account, you’re not going to still be in the 15 percent income tax bracket. Estimate the tax bracket using Bankrate’s “2010 tax bracket rates” and your expected income levels.

There’s much discussion about whether Congress will vote to extend the Bush tax cuts, currently scheduled to sunset at the end of 2010. The president wants to extend them for couples with household incomes below $250,000 and for singles with incomes below $200,000. The Republicans want them extended to all households.

If the tax cuts sunset, you could be in a higher marginal federal tax bracket in 2011.

If it makes no difference to the asset implications of funding the trust; you’d want to time the distribution(s) to minimize the taxes owed. That means waiting for Congress to decide what it’s going to do about the tax cuts, at least up until mid-December. Allow yourself enough time to get part (or all) of the distribution in 2010.

I can’t comment on the advisability of an asset protection trust. I’m presuming you’re doing it to finesse the Medicaid spend-down provisions. I’m also guessing you’re doing it early enough that you don’t expect the look-back provisions in the law to go back to the time when you funded the trust.

If you need a second opinion on setting up this type of trust, meet with another elder law attorney.

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