This blog post was written by Student Advisory Council member, David Gonzalez.
Retirement is an exciting time! Whether you now have time to spend on a well-deserved vacation or full-time hobbies, planning for the decades ahead is a crucial first step toward living a comfortable retired life. Here are the answers to some questions you may have.
When should you withdraw your retirement funds?
Of the various types of retirement plans, 401(k)s and traditional IRAs are the most popular. Since you can’t hold a balance in these accounts indefinitely, you will be required to withdraw at least a yearly minimum quantity called the “required minimum distribution” (RMD). Failure to withdraw the required amount will result in an 50% excise tax on the RMD amount that has yet to be withdrawn, so be sure you’re aware of how much money you need to take out and when.
If your 70th birthday is July 1, 2019 or later, you are required to withdraw an RMD beginning at the age of 72. However, if you turn 70 before this date, RMD withdrawal begins upon turning 70 ½ years of age. Withdrawals can begin earlier than this without an RMD if you decide to retire in your 60s.
How much should you withdraw?
Usually, as the plan owner, you are required to calculate your own RMD. However, in some cases, plan administrators, such as your employer, will generate it for you. You must take out at least a minimum amount every year.
You are, however, allowed to withdraw more than this amount if you would like, but it is important to note that any amount withdrawn above the RMD in a year will not count toward RMDs for the subsequent years.
Equally important to note, each withdrawal will be considered taxable income. You’ll want to plan for this when deciding how much to withdraw.
What’s the best way to plan for RMD withdrawal?
Now that you are withdrawing money from your accounts, it is important to develop a strategy for doing so, especially since retirement is longer than most people anticipate.
If you are in your 60s, you can take advantage of the fact that you are not yet subject to RMDs, meaning that you can withdraw money from your retirement plan up to the tax bracket limit to ensure a minimal tax rate. You may also want to consider consulting with a financial advisor who can walk you through a step-by-step sustainable yearly withdrawal plan. This may mean that you reallocate your assets, from stocks to bonds, for example, in order to minimize the risk of your portfolio.
Our partners at GreenPath Financial Wellness are always available to provide certified financial counseling. For more information on RMDs, visit the IRS Website.