For Mark Roberts’ Use: Until you retire, most of your life will be spent working hard and saving for retirement. You might focus on your savings goal so hard that you forget you will one day withdraw money from that account! But your withdrawals are another important part of the overall retirement planning process. Analyze your withdrawal plan before you retire, so that you can build a smart income strategy around these distributions.
While your situation could from the norm, this is how a typical distribution scenario works.
At age 59 ½, you become eligible for retirement plan distributions. Most people are still working at this age, so you won’t need to begin payments unless you have managed to retire early (or needed to retire, due to disability or some other reason). It is usually best to work a few more years, if you can, and delay these distributions for as long as possible. This allows your capital to build interest for a few more years, and also shortens the length of time that you will be taking distributions.
Do you hold investments that are not part of a deferred annuity or qualified retirement plan? It is often better to access that money first, because the payments usually result in a lower tax liability than distributions from a retirement plan. Of course, this is not always the case, and we should sit down and discuss your plan before you take action.
Once you reach age 70 ½, you are required to take minimum distributions (called RMDs) from your retirement account. If you don’t take your RMDs by this age, you will be subject to a tax penalty. The only exception to this rule is the Roth IRA, which never imposes required minimum distributions.
If you do wait until age 70 ½ to begin taking distributions, pay attention to your tax bracket. Depending upon the timing of your birthday, you might actually have to take two distributions that year, which can throw you into a higher tax bracket and trigger higher taxes.
Remember, also, that distributions from your qualified retirement account (such as a 401(k) are taxable. If you make a lot of money one year – for example, you sell your home for a large profit – then you might need to plan ahead to take a smaller distribution or none at all. Otherwise your tax bracket could be affected, and you might owe more to the IRS.
If all of this sounds confusing, that’s because it is! Each type of retirement account comes along with its own set of rules. Add complicated tax laws to the equation, and you can see why most people consult carefully with a skilled financial advisor to plan their retirements. Give us a call and we’ll be happy to help you plan your distributions to best benefit you.