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Why So Many Retirees Don't Tap Their IRAs

IRAs were designed to be used during retirement to supplement your other sources of income. But a recent study from the Employee Benefit Research Institute found that many retirees only take IRA withdrawals when the IRS forces them to.

In the following video, Dan Caplinger, The Motley Fool's director of investment planning, looks at the EBRI study and its implications, noting that only 20% of traditional IRAs had withdrawals in the most recent year for which data is available. Dan points out that it makes sense for retirees to use IRAs as a last resort for a couple reasons. First, those who invest in Annaly Capital (NYSE: NLY  ) , American Capital Agency (NASDAQ: AGNC  ) , Windstream (NASDAQ: WIN  ) , and other high-yielding stocks want to keep their income tax-deferred as long as possible. Second, retirees don't want to pay the tax on traditional IRA withdrawals any sooner than they have to. Dan concludes that smart tax planning sometimes requires different strategies, but in general, most people shouldn't expect retirees to start taking IRA money out before the tax law requires withdrawals.

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Read/Post Comments (6) | Recommend This Article (17)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 17, 2014, at 5:49 PM, cdeaver wrote:

    I only use my IRA MRD and I use it to pay my property taxes each January. My IRA us strictly for this purpose and should I need emergency funds.

  • Report this Comment On February 17, 2014, at 9:20 PM, TechGuy6554 wrote:

    If retirees do not want their heirs stuck with huge tax bills, they need to do some planning.... which may dictate taking distributions on IRAs sooner rather than later. Once a retiree starts taking MRDs at age 70 1/2, when he/she dies, the heirs are required to CONTINUE taking MRDs, even though they are probably at a peak tax-paying point in their lives. It may be a better strategy to take withdrawals earlier, pay a lower tax, then invest the money in a taxable account. Your tax accountant can tell you for sure.

  • Report this Comment On February 17, 2014, at 9:57 PM, Kelly wrote:

    IRA withdrawals just give you tax liabilities. Smart folks figure out a way to get their money into a Roth IRA instead. Once you have your income and tax liability set up, an IRA distribution just screws it all up. Make it all tax free upon withdrawal and it makes much more sense.

  • Report this Comment On February 17, 2014, at 11:26 PM, Blackthorn wrote:

    What is the tax implication in converting an IRA to a Roth. Would it be done all at once or in stages?

    Thanks for any insight.

  • Report this Comment On February 18, 2014, at 10:25 AM, oldfart139 wrote:

    You pay taxes on whatever amount you choose to convert as regular income (not capital gains or dividends). If you are old enough to have to take MRDs from a regular IRA, (also taxed as ordinary income) the combined amount can easily push you into a higher tax bracket, so ytou have to be careful how much you convert at a time.

  • Report this Comment On February 18, 2014, at 1:14 PM, FoolFanInFla wrote:

    To Blackthorn: I am planning to convert my Traditional IRA and 401K funds to Roth, but only in stages. Unlike IRA contributions, withdrawals must be made before the calendar year ends, so I will plan my conversion amount such that I remain in the lowest bracket which will afford a reasonable conversion amount. It will take several years to do this, but it will be worthwhile over the long haul. Good luck with your plan!

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Dan Caplinger

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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