Withdraw from traditional IRA or 401K in 2004 for 2003 income

[Guest BmattIII]

In preparing our 2003 federal taxes our adjusted gross income is significantly lower than our itemized deductions/exemptions. We are both over 59 1/2 years old but not yet 70 1/2. Can we withdraw funds from our Traditional IRA or 401K before filing our 2003 federal taxes, that will increase our income to an amount equal to our deductions/exemptions and avoid paying any taxes on this withdrawal?

Thanks in advance for your response!

[ElGuapo]

Sounds like a great strategy for future years, if your situation is likely to be the same. But no, there is no grace period for treating withdrawals (or conversions--I'll explain) as being done in a prior year. In other words, you would have needed to take that money out by December 31.

Going forward, the question I would ask is Do you need the money now for income? If not, and assuming your income level doesn't disqualify you, a better plan might be to convert these distributions to a Roth instead. That way you've forever settled the tax bill on that money, probably at no real cost to you, and it still has the opportunity to grow and help you down the road. Just ask your IRA custodian for a Roth conversion request form, and this time do it before year end!

[Guest BmattIII]

Ty, so many thanks for your very quick and informed response. I understand your point regarding the Roth, and if we're in a similar situation (hopefully we won't be because of significant medical expenses this year) we'll follow your advice. Again, many many thanks!

[John G]

I highly recommend that you see your tax advisor or accountant before you do the conversion to make sure you qualify and are doing the math correctly.