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Spend Your IRA First - Maximize Your Social Security

John V. W. Howe

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Ask almost any financial planner if you should spend your IRA first or last and you will be told to spend your non-qualified (after tax) savings first and your qualified (IRA, 401K, 403B) funds last.

Recent research has shown this is not necessarily the best way to use your retirement funds.

For the sake of brevity, we will refer to the qualified plans as IRA in the rest of this article.

Most retirees will receive their retirement income from a combination of their non-qualified savings, their IRA, and from Social Security and/or a pension. Income tax must be paid on the funds coming from the IRA, Social Security, and the pension. You were already taxed on the principle of your non-qualified savings so only the dividends, capital gains, and interest will be taxable on them. The dividends and capital gains receive lower taxation than your normal tax bracket.

One reason to spend your IRA first is to use it to delay taking Social Security until age 70. This will increase your Social Security benefit by approximately 162% over taking it at age 62 and by approximately 135% over taking it at age 66.

By maximizing your Social Security benefit at age 70, you are taking advantage of a monthly income stream guaranteed by the United States Government that is adjusted for inflation. Where else can you find income of that quality in the financial markets?

Inflation has to be a concern of retirees since it can substantially erode retirement savings. By maximizing the amount of your Social Security benefit, you are minimizing your exposure to future inflation.

If you read the current financial press, many writers are predicting inflation to increase in the future. Even now with the increase in oil prices, food prices, and prices of other items, we are seeing a short term increase in inflation. If inflation continues to rise in the future, you need to have a plan to minimize its impact on your retirement. Social Security will shield that part of your income from inflation so maximize your Social Security benefit.

Another reason to spend your IRA first is to save taxes during your retirement and give you more after tax income to enjoy in your retirement.

Every dollar of your IRA is taxable when you withdraw it. You were allowed to deposit it into the IRA tax-free, but now is the time to pay Uncle Sam. The concept is that you put the funds in the IRA when you were working and in a high tax bracket so you could withdraw them in retirement when you were in a lower tax bracket.

What if taxes are increased? This will increase the tax you pay on your IRA withdrawals. Unfortunately, it appears taxes will increase during your retirement to support Social Security, Medicare, War on Terror, and other government programs.

Spending your IRA first can also lower the amount of tax you have to pay on your Social Security benefits. This will be covered in detail in another article.

In summary, spending your IRA first can increase your Social Security benefits, lower your tax exposure from potential tax increases in the future, and lower the tax you pay on your Social Security income.

Disclaimer: The information in this article is general information. If you want to leave an estate to your children or if you are in poor health, concepts presented in this article may not apply to you. Seek professional advice from your accountant or a professional adviser.

Copyright 2008 John Howe, Inc.

John V. W. Howe is an entrepreneur, author, inventor, patent holder, husband, father, and grandfather. He has developed several websites to help retirees (or soon to be) plan for retirement.

His newest website, - discusses and reviews the controversial new financial planning book, SPEND til THE END, written by Laurence Kotlikoff, Professor of Economics at Boston University, and Scott Burns, nationally syndicated personal financial advice columnist.

SPEND til THE END is packed with many gems of retirement wisdom including more information about increasing your Social Security benefits.


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