There’s something about a new work week that gets you thinking about how you want to spend the weekend. The same goes for planning a vacation once you get back from one. Work is fulfilling, but life’s “rest times” are what Chattanooga people like you and I work so hard to enjoy.
The work makes the rest possible — and the rest makes the work more fulfilling.
So, I want to be smart about these things. I bet you do too. So, I’m a planner. It’s also kind of what we do around here for you. There’s old Benjamin Franklin with the aphorism: “If you fail to plan, you are planning to fail.”
And all of this is essential when it comes to our sunset years.
Did you know that the average length of retirement is only 18 years? Though the form and structure of “retirement” has massively changed within our culture, what hasn’t changed is the shared understanding that the payoff for all your years of labor and toil should be restful.
So we need to put together strategies NOW, before the sunset, to help that “nest egg” grow, as well as make a plan for breaking that egg open when that 18-year stretch arrives. The government will want their share, and you could be smacked with penalties if you don’t withdraw accordingly.
(I’m also here to remind you about the October 17th extension deadline that is rapidly approaching.)
Here’s a withdrawal strategy that will help you plan accordingly…
John and Wanda King’s Strategy for RMD Withdrawals
“Money in the bank is like toothpaste in the tube. Easy to take out, hard to put back.” – Earl Wilson
Most Chattanooga people who think about their money for retirement concentrate on one goal: putting the bucks in. Taking it out in your golden years is easy peasy, right?
Given why you withdraw your required minimum distributions (RMDs), you want to make sure taxes don’t eat too much. (You didn’t think Uncle Sam and the state were going to leave you alone just because you stopped working, did you?) RMD withdrawals take planning.
Starting at age 59½, you can start taking annual RMD withdrawals from your 401(k) or individual retirement accounts, including a Simplified Employee Pension (SEP) or a Savings Incentive Match Plan for Employees (SIMPLE) IRA, without penalties (more on this in a minute).
Everyone used to be able to take RMD withdrawals when they hit age 70½. Now, if your 70th birthday came on or after July 1, 2019, you can wait until age 72: In fact, you have until April 1 after the year you turn 72. Otherwise, you have to take your RMDs by December 31 of each year.
Clearly, the IRS doesn’t want you socking away money forever.
Your RMD is calculated using a table based on how many more years you’re expected to live (on average, not for sure). Generally, your remaining account balance is divided by the appropriate number from the table to see how much you have to withdraw each year. (We can help you figure out this number.)
These RMD withdrawals count towards your total taxable income for the year, meaning you have to pay income tax at your regular tax rate.
So I’ll just leave it in there, where it’s snug and invested and can keep growing. Who’s going to care?
The government, that’s who. If you don’t take RMDs on time or you withdraw too little, you get smacked with a penalty equal to half the amount not taken as required. The IRS has been known to forgive “reasonable” mistakes if you take steps to quickly fix the problem. But still … ouch.
Timing means a lot
Planning ahead with a deeper RMD know-how can open your options and ensure you make the best use of your withdrawals.
If you take an RMD before age 59½, for instance, there’s usually a 10% early withdrawal penalty. Exceptions include using limited amounts of the money for a first-time home purchase, a birth or adoption expense, and some other special expenses. (DO NOT touch your money without first checking with us on the rules and tax forms needed.)
What about tapping your money the moment you hit the minimum age?
- You will have less money for later, true – but those funds might help you put off taking Social Security, which increases your eventual monthly benefit (assuming there’s money left in Social Security when you get there).
- Taking out more money earlier can also reduce the size of RMDs you’ll have to take later, an important point if you think you might be in a higher tax bracket in retirement.
What about waiting as long as possible to take RMD withdrawals (a good move if you think you’ll be in a lower tax bracket when you retire)?
- That could work well, but realize that the first year of RMDs could sting if you wait until April of the year after you turn 72: You’ll have to take an RMD then and also by December 31 of that year. That could kick you into a higher bracket or otherwise make it a tough calendar tax-wise.
All that to say … Do the math before you get near that age. We’re happy to help.
Convert to a Roth IRA. These retirement accounts don’t require RMD withdrawals at all for your lifetime. You won’t pay taxes on withdrawals (even the earnings) if you’re older than 59½ and have had the account open for at least five years. You will pay tax – sometimes a lot – on money you initially move from a traditional retirement account, among other costs. Conversion is a long-term strategy, especially if you think you’ll be in a higher tax bracket in retirement.
Keep working. Did you know … If your money’s in a 401(k) and you don’t own 5% or more of the company, you can delay distributions from the account until you retire – even past age 72. This applies only to your 401(k) at the company where you currently work.
Donate. You can give RMD from a traditional IRA by what’s known as a qualified charitable deduction. You have to be 70½, the amount has to be less than a hundred grand, and the money has to be a direct transfer (careful here …). You can’t deduct the charitable deduction (which you couldn’t do anyway unless you itemized on your tax return), but you won’t pay taxes on the RMD.
This is just a starting point for Chattanooga retirees (present and to be). There’s more I could say and there’s more I could help you look into regarding your specific situation.
But, whatever you do, make a plan for how to maximize your retirement and withdraw from it so that you can truly enjoy the retirement rest and not worry about how to make it stretch.
On your team,
John and Wanda King