Are You Confused About Tapping into Your Retirement Funds?

If you’re wondering whether to take funds from an investment retirement account (IRA), 401(k), or a Roth IRA, don’t be tempted by instant gratification. You should not tap into all of your accounts at once. The more efficient move is to add up the assets in your traditional IRA accounts and make one withdrawal from a single IRA.

If you know the rules and plan carefully, you can maximize your retirement account withdrawals. Here are six savvy ways to withdraw from your retirement funds:

1. Understand the rules. Your Roth IRA and traditional IRA, simplified employee pension plans (SEPs), Simple IRAs, and 401(k) plans have different rules for taxes and withdrawals. With Roth IRAs, you don’t have to pay any taxes on withdrawals unless the Roth is less than five years old. But you may wind up paying more in lost opportunity.
2. Make smart distributions. Withdraw from taxable retirement accounts first and leave Roth IRAs alone for as long as possible, earning interest annually. Keep in mind that taking distributions in a tax-smart way depends on your particular situation. Before withdrawing money, be sure to run the numbers.
3. Determine required minimum distributions (RMDs). With non-Roth IRAs, you have to start taking RMDs when you reach a certain age, and you will owe ordinary income taxes.
4. Consider your spouse’s age. If you have a significantly younger spouse who will inherit your IRA, you may be able to reduce your required distributions, thereby trimming taxes and making your retirement funds last longer. Because life expectancy is one factor in calculating RMDs, if you’ve named that spouse as your sole beneficiary, and he or she is at least 10 years younger than you, your RMD is computed using a joint life-expectancy table. This will reduce the amount you need to distribute in any given year.
5. Move assets wisely. Move assets from your IRA into a taxable account, and they’ll be assigned a fair market value on the date they’re moved. This withdrawal may be easier and less expensive than triggering transaction fees by selling the securities in the IRA and buying them back in a brokerage account.
6. Continue making contributions. If you’re still working when you are 70.5 years old and still are contributing to a 401(k) or 403(b), you may be entitled to an RMD reprieve in your current plan. You can delay taking RMDs until April 1 of following the year that you separate from service, at which point you’ll have to start taking withdrawals.

These are just the basics of what can be a complex series of decisions. These decisions need to be measured against any company pensions and a spouse’s retirement plans. The point is to make informed decisions. Give us a call today so we can review your particular situation.

We welcome the opportunity to put our tax expertise to work for you. To learn more about how our firm can help advance your success, don’t hesitate to contact Kathy Corcoran at (302) 254-8240.

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