July 22, 2016
Retirement Needs a Strategy Too
Each and every one of us has built our life with a series of strategies – a business strategy, a job strategy, a health strategy, a family strategy. Well retirement needs a strategy too, because the old saying “What the IRS giveth, the IRS taketh away” is no joke.
At age 70 ½, the bill comes due on those tax-deferred savings accounts you’ve been stockpiling, and the oldest baby boomers are just starting to reach that finish line – with many more millions to follow.
These waves of retirees will be required to start withdrawing money from their IRAs and 401(k)s following a predetermined IRS formula. While it is great to be receiving additional income, these annual withdrawals can also push you into a higher tax bracket. It is imperative that you know the rules because in this scenario, ignorance is not bliss.
If this is confusing or you’re looking for some additional advice, we may be able to help. Feel free to ask – we also have an entire section on our website dedicated to this very topic accessible at your leisure.
In order to make your monetary transactions most efficient, you need to plan far in advance of that magic number – 70 ½. So if you are looking to get the most out of your money in retirement, you will want to familiarize yourself with the basics of these required minimum distributions (RMD).
To get a jump-start on what this entails, here are a few quick rules of thumb:
- While you have the option of tapping tax-deferred retirement savings accounts without penalty starting at age 59 ½, you are required by law to start taking distributions from your IRA, 401(k), and other tax-deferred accounts by April 1 of the year after you turn 70 ½. From then on, you have to take these distributions out before Dec. 31st each year. However, if you are still working at that age and participating in your employer’s retirement plan, you may be able to defer RMDs from that particular account.
- The amount you must withdraw is tied to an IRS formula based on life expectancy.
- And the penalty for noncompliance is steep. You face a 50% tax if you do not take your RMD punctually. You can avoid this hefty penalty by having your IRA custodian calculate your RMD for you and automatically transfer the money to your account with them or your bank, this service is nearly universally offered.
Everyone’s situation is different, and no one can predict the future or its tax policy, but here is one bit of advice that applies to all: any financial adviser you use should be a fiduciary – meaning they are legally required to act in your best interest – because that is the only way you will know, without a shadow of a doubt, that your adviser has your absolute best interest in mind.
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