Help! lol What should I do {Traditional IRA}

[gringott]

Yes, I have a bit of money in a traditional IRA. I stopped working at 58, joined Social Insecurity at 62, am unable to put money in due to my status but I can split my wife's allotment between us. When I do that I put it in a ROTH I can grab any old time.
The problem is I want OUT of the Traditional IRA as soon as possible.
I do know I will get a tax hit, but I am not that bright as to how much.
I suspect this is a good time to do it, my wife had low income last year and this seems to be the same [illness etc].

Is there a tool or guidance on how much the hit will be based on how much I take out?
Or do I have to seek out a financial professional?

I'm just a grunt so don't laugh at me please amigos. My ego will be crushed.

 

[EO 11110]

suggest looking at converting the traditional IRA to a roth IRA. the amount converted will be 'income' for the tax year. so your tax bill will reflect that income. the best time to do this is when you have a low income year or/and the assets in the traditional IRA are not highly valued. there are income tax estimators online that will show you the effects on your tax return

if one spouse is working and making over 14k, BOTH of you can contribute the maximum amount of 7k to your IRAs. they call it spousal IRA contributions.......this rule was put in place for stay at home moms, etc. check my work, i'm going off of memory....

spousal ira contributions: https://www.nerdwallet.com/blog/investing/spousal-ira-what-it-is-and-why-you-should-open-one/

if you want to cash out the traditional IRA (not convert to roth) - the income tax estimator will work for that too - it will be the same effect as claiming it for the roth conversion in the above example

 

[FlaGman]

My traditional IRA became more palatable to me when I rolled it out of my “financial advisor’s” firm and into one that I could personally control and understand. I have a regular investment account as well as an IRA and a Roth. I like having the IRA and Roth available to me because I can trade in and out of stocks as I wish without having to worry about paying capital gains taxes.

For instance, right now I am way up on everything I own, but can‘t make any adjustments in my taxable account because I don’t want to show any more income this year. In my opinion it is nice to have all three options.

 

[tigerwillow1]

I began the process of draining the traditional IRA a few years ago. Back then I had all the numbers in my head but have to talk in generalities now. My goal was to drain the traditional IRA paying as little tax as possible. Putting it into a roth IRA does not affect the taxes, and I see no downside to doing a roth conversion unless you want to spend the money right away. Forget capital gains rates. All before-tax contributions you put in and any gains are taxed as ordinary income. IMO you will have to bring yourself up to speed on the tax system or get somebody else to help. It's a big number crunching exercise and the tax code interactions make it a bit complicated. I generally used spreadsheets to make a plan, then ran the numbers through a tax prep program to sanity check the results. I came up with an 8-year plan to drain the IRA, which of course is based on the assumption that the tax code doesn't change over that time (in the when-pigs-fly likelihood). My general rules of thumb:

1. Whatever tax bracket you will be in, withdraw at least enough IRA money to max out that bracket. My plan is to "escape" as much as I can in the 12% federal bracket. Different situations would target different brackets. The nice thing is you have control over how much IRA $ you withdraw and can do it near the end of the year to hit the tax bracket top with fairly good precision. The social security tax trap interacts with this goal.

2. If you make any charitable contributions look at QCDs (Qualified Charitable Distributions). The net effect is that withdrawal money you would have been taxed on doesn't get taxed. Even if you withdraw and later use the contributions as an itemized deduction, the amount still runs up your AGI. Most IRA custodians make it a pain to do QCDs. With Fidelity you can just write checks. Perhaps others offer this too.

3. Be aware of the social security tax trap. Social security payments are taxed on a sliding scale from 0% to 85%, using a senseless looking and horribly convoluted formula based on AGI. You are quite likely to be somewhere inside that sliding scale, so whatever you withdraw from the IRA increases how much of your SS is taxed. The net effect after all the interaction monkey business is applied is that a 12% bracket IRA withdrawal is really taxed at a higher rate (up to about 22% for me, could be different for you).

4. If you have a state or local income tax it can make the planning a lot harder. I have a state income tax and it makes it more complicated.

5. If you have a good amount in the IRA, withdrawing it all at once just to get it over with is very tempting. You'll probably come out better spreading it over at least a few years.

6. If your AGI is much over $100k you have to factor in the various deduction phaseouts that the IRA withdrawal might push you into.

 

[gringott]

Thanks everybody that was helpful.
I am in the situation of being retired and my army retirement is not considered earned income. Yeah I know.
Tigerwillow, yes I have problems with the SS money the last two years, because my wife's income.
Thank God no state tax for me. The wife pays however.
At least I know where to start.