During our working years, we tend to focus on setting a savings goal for retirement, and then working steadily toward that goal. When you reach retirement, your mindset will shift a bit. Instead of working toward a savings goal, you’ll be deciding how to spend your money. In particular, you will be planning a budget and then setting retirement plan distributions accordingly. It sounds simple, but since you want that money to last for the rest of your life, strategy becomes key to pursuing your long-term goals.
You can begin taking distributions from your retirement fund at age 59 ½, but since you will probably still be working at that age, it’s usually a good idea to leave your money in the account where it can keep growing. Your focus at this point is saving for a few more years, and paying down your debts so that you can retire on a simpler budget.
Most people retire at some point during their sixties, depending upon lifestyle goals and maybe even medical needs. During this time, you should start planning your retirement plan distributions so that you can make the best use of your money. It might be a good idea to first access income that is not part of your retirement account, if you have it (especially if that income allows for lower tax liability). That way your retirement account can continue to grow a bit longer.
Allowing your money more time to grow is a good idea, but the rules state that you must begin taking distributions by age 70 ½. Otherwise you will face a stiff tax penalty.
So, if you’ve managed to wait until age 70 ½, you might imagine that you’ll simply begin your required minimum distributions. Not so fast! Since you have until April 1 of the following year to take your first RMD, you might be tempted to wait as long as possible. Since you must take your next RMD by December 31 of the same year, however, you should make this decision carefully. Taking this route could push you into a higher tax bracket, and trigger excess taxes.
Another important consideration, as you begin taking distributions from your retirement account, is to consider other forms of taxable income. For example, if you sell your home at a profit during one year, you might want to take a lower distribution that year in order to stay in your current tax bracket.
As you can see, your retirement plan distribution strategy can get complicated. You can’t just decide upon an annual distribution and then forget about it! Consult with us as you plan for retirement, and then keep checking in on a regular basis. We can help you plan for issues like this, so that you hopefully won’t face a surprise tax bill one year.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.