Recently, a reader asked a question that vexes many fortunate Americans: Are required minimum distributions from individual retirement accounts...

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Recently, a reader asked a question that vexes many fortunate Americans: Are required minimum distributions from individual retirement accounts harmful to the survival of IRA portfolios?


The short answer is no. The distribution requirements are smaller than our life expectancy, regardless of age or marital status.


But it left an unanswered question: Is there a way to avoid nasty increases in our tax bills once we have retired?


The answer is yes, but it requires close attention to your account balances, required minimum distributions and tax brackets.


You can understand by working through an example.


For 2005, a retired couple will have a standard deduction of $10,000, an elderly deduction of $1,000 and two personal exemptions totaling $6,400.


This means their first $17,400 of income, regardless of its source, is tax-free. The next $14,600 is taxable at 10 percent. Their taxable income of $14,601 to $59,400 is taxed at 15 percent. After that, income of $59,401 up to $119,950 is taxed at 25 percent.


And income over $59,400 but less than $119,950 is taxed at 25 percent.


(I will ignore an added wrinkle, the taxation of Social Security benefits when your income exceeds certain amounts, because it is too complicated.)


What all of us should do is “ride” our tax-rate band, taking as much as we can in withdrawals at the lowest possible rate.


Suppose the Thrifties are 68, have $400,000 in their IRA and need $12,000 in addition to their Social Security income to pay their bills. Should they take only $12,000?


No. Because the first $17,400 is tax-free, they could withdraw an additional $5,400 and still pay no taxes. The additional withdrawals would reduce the balance of their account so that when they had to make required minimum distributions when they were 70 or older, the amount that would be taxable would be smaller.


Similarly, once their required distributions put them into the 10 percent tax bracket, they might consider withdrawing more, knowing that every dollar withdrawn at 10 percent today might be a dollar they would have to withdraw at 15 percent in a few years.


Is this worth doing?


Absolutely. In the current market, the difference between zero taxes and 10 percent taxes is more than two years of interest income. The difference between 10 percent taxes and 15 percent taxes is at least a year of interest income.


What do you do with the additional money?


The conservative thing to do would be to invest in I Savings bonds, knowing the money would be accessible without penalty in five years, that its growth would exceed the rate of inflation and that it would grow tax-deferred until redeemed.


Questions about personal finance and investments may be sent to Scott Burns at The Dallas Morning News, P.O. Box 655237, Dallas, TX 75265; by fax at 214-977-8776; or by e-mail at scott@scottburns.com. Questions of general interest will be answered in future columns.