Five Reasons to Hold onto Traditional IRAs

The long-term benefits of tax-free accumulation and no lifetime required minimum distributions make a persuasive case to go all-in on a Roth IRA, especially for younger workers, especially those under the ages of 40 or 50. However, there are good reasons to have money in a traditional IRA when you’re retired. With a traditional IRA, you’re getting an upfront tax deduction that you would not get on a Roth IRA, so here are five reasons why, with effective tax planning, it may be good to hold on to some traditional IRAs versus only using a Roth IRA.

Reason Number 1: Potentially lower tax brackets in retirement.

At age 70 ½, you must begin taking required minimum distributions (RMDs) from traditional IRAs and qualified retirement plans. When you’re in the “sweet spot” between retirement age and age 70 ½, you can very oftentimes fill up those lower tax brackets at 10%, 12%, or even 22%; as opposed to when you were in your working years, you were taking tax deductions at 25%, 28% or potentially 33%. You can fill up these lower tax brackets in retirement with effective tax planning.

Reason Number 2: Medical Expenses

Many retirees take significant medical deductions, sometimes in excess of $100,000, for things like long term costs or home modifications for wheelchairs. You will not get the value of those deductions if you don’t have more taxable income on your tax return to begin with, so it can be a good way to potentially get tax free distributions from your IRA.

Reason Number 3: Business Losses

If you own a business and you’re having losses, you can offset those losses with essentially taxfree distributions from your traditional IRA. You won’t get the value of those business losses if you don’t have much taxable income in retirement.

Reason Number 4: Beneficiary Tax Rates

When you pass away, and your traditional IRA goes to your children, they will be taxed when they withdraw the money at their tax rate. Is their tax rate lower than yours? While we don’t know what the future holds with tax rates, we would be remiss to not consider the impact of beneficiary tax rates when they take out the distributions from your IRA.

Reason Number 5: Qualified Charitable Distributions

For those who are 70 ½ years old or older, you can give money directly to charity or to a church from an IRA and receive a page 1 tax deduction, which is much more powerful than taking a charitable deduction on page 2. By taking a deduction on page 1 with a qualified charitable distribution (QCD), you’re also potentially lowering your Social Security taxation and your Medicare premiums. A deduction on page 2 does not help you with taxes on Social Security income and Medicare premiums.

Tax and IRA information sourced from Ed Slott & Company, LLC