Financial Wisdom for Retirement

It Isn’t Just About Saving Money

For most of your adult life, the importance of saving for retirement has been drilled into your head. But saving money for retirement is only half the process. Developing a plan for using your retirement funds effectively is equally important, especially as you near retirement age.

There are many different approaches and strategies for using your retirement money most effectively. In order to develop a plan that will be best for you, the first step is to take inventory of what you have. It is best to do this before you need to start receiving benefits. As you develop your plan, you may wish to make some adjustments to your portfolio. Your retirement income will likely come from a combination of IRAsannuities401(k) plansRoth IRAssocial security benefits or pensions, and possibly other investments. The rules about when you can withdraw money, how taxes are assessed, and how much you can (or have to) withdraw vary. Be sure you know the rules of your investment types.

Required Minimum Distributions

As you develop your strategic plan for retirement, required minimum distributions (RMDs) will play a key role. Once you reach age 70.5, you are required to start withdrawing money from your tax-deferred investments, like your IRAs. Your financial advisor can help you calculate your RMD, or you can use tables provided by the IRS. If you do not withdraw the full amount by the deadline, there are hefty tax penalties. You will be charged 50% of what you should have taken out but didn’t.  

Since it is called a required minimum investment, you may be thinking, “How can I use it strategically?” One way is to time your RMD withdrawals right. The first RDM isn’t due until April of the year after you turn 70.5, but all other years the RMD is due by December 31. Avoid taking two in the same year, as it might bump you into the next tax bracket. Also, simply being sure to take your RMDs before the deadline ensures you bypass unnecessary—and expensive—penalties. Some people choose to automate their withdrawals to be sure they never miss a deadline. Another timing strategy some people use is to start withdrawing money from their tax-deferred investments in their 60s to spread out the tax bill and possibly stay in a lower tax bracket, thus reducing their lifetime tax bills. There certainly are rules involved, but there is still room for strategy.

Withdrawing Wisely

Another element of your game plan should be systematic withdrawals. Your RMD will be a specific amount, but it is not required that you pull money from each tax-deferred investment. Sometimes it is best to take your RMD from one account. Start with the account you like least. Also, try to avoid selling stocks at a loss in order to satisfy your RMD. Choose the right investments to withdraw from.

Being selective about which accounts you withdraw from doesn’t apply solely to your tax-deferred investment accounts. Depending on your personal circumstances and the tax forecast, you may find it advantageous to draw more from your Roth IRA (and other tax-free investments) earlier in retirement. Or, you might find it better to save your Roth IRA for later on. Many people find a combination to be most advantageous. For example, one approach is to withdraw as much as possible from your tax-deferred account without bumping yourself into the next tax bracket. Then you can supplement with tax-free investments, like a Roth IRA.

Another withdrawal strategy to consider is rolling a tax-deferred investment into a Roth IRA. You will be taxed at the time of roll-over, but then that money will not be subject to an RMD and it will continue to accrue interest until you need to withdraw it.

Minimizing Taxes

You can’t completely avoid paying taxes. But you can avoid paying more than you need to. One simple thing you can do is be sure you don’t pay taxes again on contributions that have already taxed. To do this, it is important to keep good records and understand the rules of your different investment types. Know where your contributions came from. If you paid tax on the money before you put it in, you probably don’t need to pay tax on it again when it comes out.

Another way to minimize taxes is to contribute to charity. You can send up to a total of $100, 000 each year directly from your IRA to a charity (or charities). This money will count toward your RMD, but will not count in your adjusted gross income. This can be used to your benefit to keep you in a lower tax bracket.

Seek Guidance

There are a lot of factors to consider as you outline your income plan for retirement. And remember that it isn’t a one-time thing. It’s important that you reassess each year as circumstances and your needs change. You have worked hard and saved for years. You want to be sure that you are making the most of your hard-earned money. It is best to have an expert in your corner. A trusted financial advisor can help minimize some of the stress so you can enjoy your

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