Retirement Distributions: What Young People Need to Understand Now

I bet if you ask people in their 20’s and 30’s (and maybe even 40’s) if they’ve heard the term "Retirement Distributions”, they’d say no.?

They might be saving for retirement, but most are not considering the details of how that savings will pay out when they do finally retire.?

Those who are lucky enough to have financial mentors understand the importance of saving, but in my experience, it seems the concept of distributions is rarely discussed.

One of the most crucial aspects of retirement planning is understanding how retirement distributions work.?

Whether you're just starting out in your career or are getting closer to retirement age, you need to understand how your income will look once the paychecks stop.?

How Do Retirement Distributions Work?

Many of us are saving into retirement plans like 401ks and IRAs, enjoying the tax-free benefit of saving early.

The most common misconception I’m seeing is that people are entering retirement with these large nest eggs, and only then realizing the tax burden that comes with taking withdrawals from the account.

There’s an assumption that because you’re not earning any money, you don’t have to pay high taxes like you did at your job. Wrong.

Your retirement distributions are taxed at the same bracket as if you were working.?

For example:

• Let’s say you're planning to need $100k a year in retirement to maintain your lifestyle and maybe travel more.?
• Well, you can’t just take a $100k distribution.
• You have to factor in the 22% taxes the government needs from that $100k. You’d only be left with $78k.
• Perhaps you intend to live more frugally in retirement so your nest egg doesn’t run out - smart!
• Even if you’ll only be taking $45k for example, you’re still going to pay 12% in taxes, leaving you with $39k and change.

It’s so, so important to understand that retirement distributions are taxed as if you were still working. These distributions are considered income, and the government taxes income.?

Wondering how your retirement distributions will look?

Try our Free Retirement Tax Calculator here!

Because retirement distributions have tax implications, understanding these implications can help you make more informed decisions about your retirement investments.?

The number of people who save up and are then shocked to see they’ll be sending about 20% or more of that savings to the government is staggering.?

Luckily, investors of any age have options for tax-free income during retirement and exploring all the ways to generate income is key.

Conclusion

Retirement distributions may seem like a distant concern for individuals decades away from retirement, but understanding these distributions will pay off big time.

Knowing that distributions are taxed in the same way as income from a job means you'll be able to make informed decisions about your investments, plan for ways to minimize your tax burden, and stay ahead of changing regulations.?

So, whether you're just starting out in your career or getting closer to retirement, NOW is the time to add tax-free assets to your retirement portfolio.

Reach out to me today to explore your options. I look forward to answering any questions you may have. – Jeff Faine | [email protected] or 773-318-9608.