Most retirement savings accounts offer the huge upfront benefit of an income tax break. As anyone with an IRA or similar retirement account knows, annual contributions can shave big dollars off your yearly income tax bill.
But these savings are only a deferment — rest assured, the Government always collects its due — as you’re taxed when you eventually withdraw from these accounts.
This prompts most folks to hold off on retirement withdraws until they reach the Minimum Required Distribution age marker, which is now 73.
That said, there’s a change to the tax code, which expires in 2026, that, for a limited period, changes the retirement account withdrawal landscape. And this short-term modification could make earlier retirement fund withdrawals a prudent move for those 59 1/2 years and older.
A Window of Lower Taxes
As part of tax legislation signed into law under former President Donald Trump, tax brackets are temporarily shifted.
Before the 2018 fiscal year, individual brackets were set at 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. Through 2025, however, five of these brackets have dropped to 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
Given that pretax account withdrawals are taxed at the normal income tax rate, if you’re aged 59½ you may want to consider taking out money before 2026 to take advantage of these temporarily lower rates.
Short-Term Reduced Tax Rates on Retirement Withdrawals
How much do these lower income brackets impact retirement account withdrawals? The percentages depend on your particular tax bracket and the amount held in your account. But roughly speaking, such withdrawals would be taxed at rates ranging from 12% to 22%.
The table below offers a more complete breakdown:
Use Retirement Funds Now to Alleviate Future Costs
People often consider tax planning on a year-to-year basis or over a shorter-term horizon of five years or less. And on one hand, this makes sense, considering tax laws are constantly changing, your annual earning may fluctuate, and the economy perpetually rises and falls.
But if you’re 59½ or older, you’re eligible to begin making penalty-free withdraws from pretax retirement plans. And though you still owe regular income taxes on retirement withdrawals, your rates will likely be lower through 2025.
Meanwhile, you can put these funds toward reducing future living costs. For example, paying off your mortgage and other debts. Present-day maneuvers that will lower your reoccurring costs later when you’re in retirement.
Do Early Retirement Withdrawals Make Sense For You?
Several factors come into play in determining whether withdrawals from your retirement accounts at 59 1/2 make sense. Income bracket, the amount of money in your accounts, and your future plans are all key considerations.
It’s also wise to consult a qualified professional versed in the tax code and financial strategies when contemplating long-range tax planning.
If you have questions about the short-term tax break on retirement account withdraws or other retirement tax planning options, get in touch for a FREE consultation!
