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Many retirees use money from their retirement accounts to pay everyday expenses and cover their bills. Knowing the rules concerning distribution for these accounts can help you avoid costly tax penalties and consequences from the IRS when it's time to withdraw money from your IRA and employer-sponsored retirement plan accounts.
Retirement Distribution Planning refers to determining when you'll withdraw money from a retirement account and how much you'll take out. A financial planner can help you maximize your tax efficiency and ensure that you'll have enough money to cover your immediate needs, medical bills, and long-term care you may need later in life.
Retirement distribution planning is important because not every type of retirement account has the same rules about taking money out. It's not like a checking account, where you can simply withdraw what you need as you need it.
When it's time to withdraw money from your employer plans and IRAs, understanding the distribution rules can help you make informed choices. Proper retirement distribution planning also ensures that:
The Required Minimum Distribution (RMD) for retirement accounts is the minimum amount you have to withdraw from your account each year. Different types of accounts may have different minimum withdrawal amounts, but the IRS stipulates that you have to take out a certain amount of money each year. You can draw out more than the minimum if you choose.
To determine the required minimum distribution on your retirement accounts, divide the year-end balance of the account by the Life Expectancy Factor from the IRS Uniform Lifetime Table. However, if you're married, the amount will change depending on whether your spouse is the primary beneficiary for the account and depending on whether they're more than 10 years younger than you. An age difference of more than 10 years is the threshold where the RMD changes.
Your Medicare premiums for Part B and Part D are calculated on your annual income. The distributions from your retirement accounts can count as part of your annual income, so if you don't properly manage the distributions, you could end up bumping yourself up a bracket and paying more per month for the same coverage.
A Roth IRA conversion can be a great way to increase your retirement benefits. For example, if your income taxes go up, either because you're earning more or because tax rates overall increased, then Roth IRA accounts can help save you money on your taxes over the course of several years.
Although there is no up-front tax deduction for contributions to your Roth IRA, the earnings and interest from the account are tax-free. Once you pay the taxes on the amount that you contribute to the account, then, assuming that you take the RMD later, your money will be tax-free in the future. Determining whether you should convert your 401k to a Roth IRA or if you should open a Roth IRA and contribute to it on your own is an important conversation to have with your financial planner.
While there are no guarantees, smart financial planning and a structured plan for retirement distributions can help ensure that the savings you worked so hard for aren't eaten up by income taxes or withdrawal penalties. First, have a conversation with your retirement planner about the RMD for each of your accounts. If you have certain health conditions that run in your family, for example, ensuring that you have enough for medical bills is an important consideration.
You may also wish to keep investing your retirement savings so that you're earning interest and passive income from the investments. Putting off retirement for a few years may also be a consideration.
Retirement planning can be tricky, from managing your RMD to choosing which types of retirement accounts and investments are right for you. Don't try to navigate this complicated process alone. A financial planner can help you meet your retirement and investment goals.