How Will You Withdraw Your Retirement Funds?

For much of your career, you’ve focused on building an appropriate retirement savings. But once you retire, the strategy will shift from saving to spending - or, more accurately, withdrawing. Many retirees have spent little time considering how they will take withdrawals from their retirement funds, so you might be surprised to learn that this part of your plan should include careful strategy as well.?

The rules for required minimum distributions (RMDs).? At age 72, you will be required to start taking RMDs from your retirement account, if you haven’t already. These withdrawals must be taken by April 1 of the year after you turn 72, and by December 31 in subsequent years.?

If you forget to take your RMD for the year, the IRS will impose a penalty in the amount of 50 percent of the amount you should have withdrawn. You definitely don’t want to overlook your RMD each year or withdraw less than the required amount.?

Your RMD is based upon your age, life expectancy, and the account’s balance. So, it will change each year, and must be calculated carefully to avoid triggering penalties.?

Withdrawals from multiple accounts. If you’re fortunate enough to have savings in multiple retirement accounts, you need to strategize withdrawals in a certain order. For example, you might feel tempted to withdraw from your Roth account first, in order to avoid income taxes. But it is important to know that withdrawals from a Roth IRA do not count toward your Required Minimum Distribution.? Only regular IRAs, SEP IRAs, Simple IRAs and 401(k)s count toward RMDs.

And of course, those of you with multiple IRAs from different jobs might face confusion when it comes time to take withdrawals. One simple way to deal with this question is to roll all of the funds into one account.?

Delaying your RMD. If you’re still working at age 72, while contributing to a 401(k), you might be eligible to delay your RMDs. However, you would still be required to take RMDs from other accounts from previous employers.?

Consider a Roth conversion. In some cases, it makes sense to roll all of your retirement accounts into one Roth account. Making this move will trigger a one-time tax debt, but then the money in the account will continue to grow, untaxed. This move makes sense in some cases but is not the right choice for everyone.?

As you can see, all of these considerations create quite a complex puzzle when it comes to retirement account withdrawals. Numerous rules and tax considerations can lead to wildly varying outcomes. Meet with me before you retire, and then regularly throughout your retirement, so that we can help you strategize your retirement income plan.?