Dear Tax Talk,
At turning 69 before the end of the calendar year, can I cash out of my IRA without penalty? Also, is the gross amount that I receive treated just like any other income on my tax return? If I am retired and have only retirement from my employer and Social Security, does this reduce my tax rate any?
— Drendine

Dear Drendine,
Since you turned age 59½, you could have taken all the money out of your retirement plan without paying a 10-percent penalty. The amount you withdraw from your IRA at any age is subject to income tax. Income tax applies whether you take out a little, a lot or all of it. Of course, the more income you have, the greater your tax rate. Tax rates are progressive, so having more income will never reduce your tax rate.

With the pending expiration of the Bush-administration tax cuts, a lot of folks are wondering whether they should accelerate income this year to avoid a higher tax bracket next year. I recommend year-end tax planning for those who have a choice of taking income in 2010 at a lower rate or 2011 at a higher rate. However, in your case, the choice is not between the two years alone, as you can continue to defer most of the taxes by keeping the money in your IRA for many years to come.

The law does require you to start taking a required minimum distribution at age 70½. In your case, this won’t happen until 2012 and you could delay the first distribution to as late as April 1, 2013.

You haven’t given me any particulars about your situation, so I’ll give you some general guidance. If you’re not subject to income tax now because your pension and Social Security are below the threshold, make an IRA withdrawal up to the point where you still owe no taxes. I haven’t found any tax calculators on the Web that determine taxable Social Security based on other income, so you might need some help from an accountant on this. After that threshold is reached, I would suggest deferral for as long as you don’t need the IRA money.

If you do need the money, take only what you need because the more you take, the more you’ll lose to Uncle Sam. Also, try to split your needs between two years if possible. Don’t ever let anybody talk you into taking all of it without talking to a tax professional such as a CPA first.

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