Throughout your working years, you might focus on meeting a particular savings goal so that you can retire. However, once you retire, your focus will shift from saving to spending. It will be time to begin taking distributions from your retirement fund, and you hope for this money to last for the rest of your life. Therefore, you should carefully strategize your retirement plan distributions.
At age 59 ½, you can first begin taking distributions from your retirement fund. However, since most people are still working when they reach this age, it is often better to keep the money in the fund where it can continue to grow. During the last few years of your career, it’s a good idea to pay off as much debt as possible, so that your retirement income will go farther.
At some point during your sixties, if you’re like most people, you will finally retire. The exact date will depend upon your preferences or maybe even your medical or lifestyle needs. At this time, it’s imperative that you organize a distribution plan that allows for best use of your money. In many cases it is better to access income that is not part of your retirement account or a deferred annuity, if you have any such income source, so that you can allow your retirement fund to continue growing a bit longer. This other income might also allow for lower tax liability.
Of course, no matter how you structure your distributions, you must begin taking them by age 70½. At this point, the IRS requires you to begin distributions, or else face a stiff tax penalty.
If you do choose to wait until age 70 ½ to begin required minimum distributions (RMDs), you should plan carefully. You have until April 1 of the following year to take that first RMD, but you must take your next distribution by December 31 of that same year. This could push you into a higher tax bracket during your first year of distributions, something you might not want to do.
It’s also a good idea to consider any other forms of income as you make plans. Retirement plan distributions are taxable, so any other taxable income in a particular year could add up to higher taxes. So for example, if you sell your home at a profit, you might take a smaller distribution that year to avoid extra income taxes.
As you can see, planning retirement account distributions can get complicated. That’s why we’re here to help! Give us a call before you retire, and we can help you establish a sensible strategy. Then, we’ll stay in touch throughout your retirement, and help you continue to make adjustments to that plan.