No. of Recommendations: 3
rkmacdonald writes,

<<<<I'm looking at a possible early retirement, where I would probably need to draw down on my non IRA mutual funds (stock and bond funds). While this draw down would be well below the "safe limits," my question involves the normal interest and dividends these funds generate. At present, these $'s are automatically reinvested, with me claiming them as ordinary income. Since I'll need to draw down anyway, is there any reason why I wouldn't want to just have these $'s sent to me, instead of being reinvested?>>>>

This is exactly what I am doing. I retired at 53 and will be drawing from my unsheltered investments until 59.5. I have ceased all dividend reinvestment. I have decided that dividend reinvestment is great for accumulating wealth, but when you are in the distribution phase of life, it just makes the tax paperwork too complicated for any slight benefit it might have. I simply collect all dividends in a money market account, and if I don't spend all of them, I may reinvest in something at the end of the year. Much simpler on the tax paperwork.

Assuming you have sufficient assets outside your IRA & 401k, then the only reason you would want to start drawing from your IRA early, using the IRS 72t method (Substantially Equal Perodic Payments), would be if you had a very large IRA, and you were concerned that the required minimum distributions (once you hit age 70.5) would be so large that it would put you in a top tax bracket. This is a fairly rare situation, however, because you have from 59.5 until 70.5 to remove assets from your IRA without penalty at any rate you want to. You'd have to have a very large IRA, indeed, to still have a problem after 11 years of normal withdrawals.

I think when you retire has as much effect as how large your IRA is. A 55-year-old would only have 15 years of compounding before RMDs at age 70.5 kick in. A 40-year-old retiree would have 30 years of compounding. That's the reason I started taking SEPPs at age 40 and decided to leave my taxable account intact. Even a sub-10% growth rate in my IRA would put me well into the 39% tax bracket by age 70.5. It made more sense to whittle my IRA down while I was still in a lower tax bracket. No matter how large my taxable account gets, the capital gains tax is capped at 20% under current law.

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