Dumb question, but if traditional IRA is taxed at your tax bracket when you withdraw, why would someone not just quit their job at 59.5 yo, have $0 employment income and then withdraw from traditional and pay only taxes from the withdrawal?
Am I missing something here?
Edit: edited above to clarify what I mean with tax rate.
What if you quit your job before withdrawing from IRA?
byu/lalpsik-234 inpersonalfinance
Posted by lalpsik-234
16 Comments
Money you withdraw from a traditional IRA in retirement counts as income for that tax year. Traditional IRAs and 401ks are tax deferred accounts, meaning you don’t pay taxes on the money you put in, you pay taxes on the money you pull out when you’re retired. Roth accounts are the opposite, you pay taxes on the money you pay in, so that you don’t have to pay taxes when you take it out in retirement.
>quit their job at 59.5 yo, have $0 income and then withdraw from traditional
So quit on 12/31 and withdraw on 1/1? You can do that. That’s kinda how the whole retirement thing works.
But if you mean quit on 8/26 and withdraw on 8/27 then you don’t have $0 income.
Traditional IRA withdrawals are taxable income.
You would only have zero taxes if your taxable income is less than or equal to the standard/itemized deduction.
We have a progressive tax system so taxable income from IRAs is taxed the same way as any other taxable income.
https://engaging-data.com/tax-brackets/
You can use this link to see how taxable income is taxed in a progressive system. Where is says regular wage income that includes any ordinary income, such as wages, bank interest or IRA withdrawals.
No, you’ve grasped the entire benefit of tax-deferred, traditional retirement accounts. The major benefit they give is that you delay paying taxes in your earning years and defer them to your retired years, when you probably have much lower income and thus lower taxes.
That’s not a trick, that’s the point!
Most people don’t have sufficient money in their IRA to support 40+ years of retirement. Especially accounting for inflation and increased medical expenses when older.
You’re about 50% the way there. This is what traditional brackets are for. Reduce your taxable income at your higher income years, and withdraw it in a lower tax bracket in retirement.
It’s still taxed. The hope is you fill the lower tax brackets with traditional money, then Roth money ontop of that for your living expenses.
It’s not just job income that determines how much tax you pay, but all of your taxable income. The withdrawal from the traditional IRA is taxable income.
If you do not work a job in 2026, but withdraw $50,000 from a traditional IRA, then your income for 2026 is $50,000.
I hope you have enough in your IRA/401k to last the rest of your life if you start taking it at 59.5.
> why would someone not just quit their job at 59.5 yo, have $0 employment income and then withdraw from traditional and pay only taxes from the withdrawal?
That’s generally called retiring and what most people aspire to
there are many reasons people would stay working. a few:
– health insurance costs
– delay talking social security to maximize benefits
– doesn’t have a large enough portfolio to support retirement
That’s the point of a retirement account. That’s how it’s done. Not necessarily at 59.5, but whenever you retire/need the money.
If you just want easy withdrawal, you could retire the year you turn 55 and start traditional 401k-type withdrawals after that (as long as your employer-sponsored plan makes it possible to utilize Rule of 55 for 401k).
What stops most people? Not enough saved, too much debt, fear of the unknown (not having a job for income), health insurance (ACA plans vary by state), and more.
If you have no interest in working beyond 55 or 59 1/2, make sure you set yourself up well. This is the thought behind the “FIRE” (Financial Independence, Retire Early) movement (Your Money or Your Life–even though that was around long before the term FIRE, Mr. Money Mustache, ChooseFI, madfientist, etc).
I have a pension, but will retire next month in my mid-40s. Accessing my retirement accounts will involve more hoops to jump through to avoid an age penalty, but it’s doable.
Yeah, that’s the idea.
Traditional accounts are “don’t pay taxes now, wait until you’re in a lower tax bracket and withdraw it then so you pay less tax on it”.
And Roth is “pay taxes on it now, but don’t pay taxes on the growth later.”
For most people, traditional contributions make the most sense. But most people end up with a mix due to Roth IRAs still being beneficial in that it gives you another method of tax advataged savings.
Edit: if you want to take it a step further, check out Roth Conversion Ladders.
I assume you mean a 401k? IRAs are personal accounts they have nothing to do with employment. They are Individual Retirement Accounts (I – R – A)
It’s good to have a mix depending on your situation like Roth accounts if you have a pension and/or taxable SSA.