by Karen Telleen-Lawton, Noozhawk Columnist (read the original in Noozhawk by clicking here)
Picture a child arriving at the seashore on a brisk winter day, clutching beach toys. In no time at all, she grabs a shovel and starts piling sand into her pail. Diligent and intent on the task, she fills it and faces a decision: What to do with it? Build a sandcastle? A wall?
Filling the bucket was straightforward but the options it opens are limitless.
Withdrawing from retirement account presents a similar scene. After decades of pinching off precious parts of your paycheck to fill your retirement buckets, reversing the process presents a whole new set of options. The implications can be huge.
How do you know how much to withdraw? What strategies can reduce your taxes and increase the value of your portfolios?
Between the ages of 59½ and 72, the choice of when to begin withdrawals depends on factors unique to your own situation.
Once you are 72, you are required to withdraw a certain amount each year (Required Minimum Distributions or RMD) based on your age and the amount left in the funds. The amount and timing of your RMD can also be affected by a large age gap between spouses or the death of a spouse.
If you have several IRA accounts, you can determine the required withdrawal from each of them and then withdraw the sum from one account, if you wish.
The same is not true of employer-based accounts such as 401(k), 403(b), and 457. A minimum withdrawal must be made from each of them. Roth accounts have no minimum withdrawal but need to be in place for at least five years before withdrawals begin.
You may want to roll your employer plans into IRAs to consolidate your accounts as part of your retirement planning. This can simplify your withdrawals and give you more control.
As you seek advice on whether this benefits you, pay attention to whether your advisor is upfront about potential bias toward an option that could affect his paycheck.
If your concern for certainty is higher than your desire for control and investment return, you can consider purchasing an insurance-based solution with a portion of your retirement funds.
Fixed, guaranteed withdrawal, and longevity annuities all seek to provide a secure and stable income. Each has various trade-offs and all are strongly dependent on the underlying health of the insurer.
A few strategies can reduce your retirement withdrawal, thus reducing your current taxes. One is to continue working so you don’t need the cash.
If you work past age 72, however, you will still face an RMD on most of your retirement accounts. You may be exempted from an RMD for your current employer’s retirement account until you retire.
Another option may be to set up or expand a Roth account if you qualify for one. This is especially helpful if you semi-retire before making the full plunge. In those lower earning years, you can convert IRA funds into an existing Roth, paying taxes in the conversion but creating flexibility for withdrawals in your later years.
It is sometimes possible to time the first distribution into the tax year that is preferable to you. Be especially careful to understand the relevant deadlines and their implications. The penalty for not taking a distribution when it was required is 50% of the amount you under-withdrew.
Finally, one tax strategy can benefit your community as well as yourself. You can donate your distributions up to $100,000 per year. This choice requires you to be at least 70 years old; the distribution must go directly to the 501(c)3 organization.
For all of these strategies, check with your tax advisor for whether and how they apply to you. Financial planners such as I am can present various possibilities, but we are not tax experts. Rules and circumstances change.
None of these tax strategies is as important as making sure you take your RMDs and pay the relevant taxes.
Think of Uncle Sam as the tide washing in and returning part of your sandcastle to the sea. You can keep digging and building, but Sam has been waiting a long time for his tax share and will get it one way or another.
Karen Telleen-Lawton, Noozhawk Columnist
Karen Telleen-Lawton is an eco-writer, sharing information and insights about economics and ecology, finances and the environment. Having recently retired from financial planning and advising, she spends more time exploring the outdoors — and reading and writing about it. The opinions expressed are her own.