Exercise Care When Taking Distributions

Ray’s Take With few exceptions, the IRS requires that investors in traditional tax-deferred accounts begin to draw them down when they reach age 70 1/2. Most people are inclined to think about required minimum distributions (RMDs) once they start having to take them. It’s a good idea to start some projections well in advance of that deadline. If you miss the deadline, the IRS will access a penalty of 50 percent of the amount you should have taken. 

Bracket management is the key here as you put together the pieces of your retirement income puzzle. Juggled in the mix is when to take Social Security benefits and any other pension income along with the size and allocation of your nonqualified investments. If all of those pieces are more than sufficient for your lifestyle, you can consider distribution to your future heirs and charitable beneficiaries.

RMDs have been a planning challenge since the law that created the requirement was passed. Objections revolve around two aspects of the law. First, people don’t like being told when they have to take – and pay taxes on – their money. Second, the rules are so complicated they almost invite noncompliance.

If you don’t currently need the income from your RMD to help cover your retirement expenses, you can reinvest the distribution in one of your taxable accounts to cover future unanticipated expenses, but you still have to pay the taxes. And the tax rate for distributions from qualified plans is your ordinary rate even if it came as a qualified dividend or long-term capital gain.

When choosing how to invest the funds, remember to choose an investment mix that reflects your financial situation, time horizon, and risk tolerance. The chances of one spouse living well into their 90s is north of 40 percent. Invest accordingly. There’s no reason to upset all your careful pre-retirement planning decisions – unless there has been a significant change in your circumstances that needs to be addressed.

Whichever strategy applies to you, RMDs are likely to play an important role in your finances in retirement.

Dana’s Take It’s important to be careful with how we handle our money to make it last comfortably throughout our retirement. Paying attention to returns on funds is smart. 

Another way of being careful and making retirement funds last is to pay close attention to other aspects of our lives that affect expenditures. This means making smart choices for your body, mind and spirit. 

Loneliness is now considered a health risk for seniors. I recently read that lacking social connections is as harmful to our health as smoking 15 cigarettes a day. Who knew? 

“Use it or lose it” applies to more than money. To a large extent, aging well is in your own hands. The decisions you make, your habits and your lifestyle all affect your senior years – and how far your retirement funds will stretch.

Retirement Spending Budget
Create a Cash Flow Plan With Taxes in Mind