How you manage your resources can make a big difference in how financially secure you are during your retirement years. This includes choosing how and when you withdraw funds from your retirement accounts. The following are some of the things you should not do.
Failing to make a strategic plan
If you do not think through how you want to use your resources over time you will be diminishing the returns of your invested capital which could result in your quality of life during retirement being lower than it otherwise would be. There are some sources of capital that you should draw from first which can allow you to preserve as much retirement capital as possible for the long term.
Withdrawing and cashing out on certain types of assets will result in larger tax bills at certain times. For example, if you withdraw from some types of retirement accounts you will incur an income tax liability. Therefore, it may be best to try to wait until your income tax bracket is lower in your later years of retirement before taking some of that money out.
A professional financial advisor can help you sort out the best timing for withdrawing capital from your retirement accounts and other types of investments.
Claiming Social Security benefits too early
You are required to wait until you reach the full retirement age of 62 years before you are allowed to claim benefits from Social Security. However, just because you are allowed to do so at this age does not mean it is the best time to do so. Just like with other retirement accounts, the longer you keep your capital in the fund the more your capital will accumulate, giving you more resources during your golden years.
Therefore, you should try to plan on waiting to claim your Social Security benefits until you reach the age of 70 which is when the maximum amount of benefits is reached. Of course, the ability to wait until this age will depend on your individual circumstances.
Withdrawing too early from your 401(k) and IRA
If you withdraw funds from your 401(k) or IRA too early you will be charged a penalty by the IRS. However, once you reach the age of 59 ½ you can withdraw funds from these types of accounts without penalty. Therefore, you should do whatever you can to wait until you reach this age if at all possible.
On the other hand, just because you are allowed to withdraw at this age does not mean it is the best thing to do. Legally, you are not required to take distributions from these accounts until the age of 72. Leaving your capital invested will allow your money to accumulate more.
Taking money out of your Roth IRA too soon
Just like with other types of retirement accounts, money left in your Roth IRA for longer allows your capital to appreciate more, maximizing your retirement resources. Roth IRAs do not have a Required Minimum Distribution age like a traditional IRA or 401(k) does. Therefore, you can let your capital appreciate without withdrawal beyond the age of 72.
On the other hand, you should also consider that funds deposited in a Roth IRA have already been taxed. This means withdrawing will not incur additional income taxes.
Your financial advisor can help you understand what this means for your retirement strategy and how to develop an overall strategy that is customized for your individual needs and goals.
RMD’s are generally subject to federal income tax and may be subject to state taxes. Consult your tax advisor to assess your situation.
401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty.
Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Like Traditional IRAs, contribution limits apply to Roth IRAs. In addition, with a Roth IRA, your allowable contribution may be reduced or eliminated if your annual income exceeds certain limits. Contributions to a Roth IRA are never tax deductible, but if certain conditions are met, distributions will be completely income tax free.
Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation
Neither Raymond James Financial Services nor any Raymond James Financial Advisor renders advice on tax issues, these matters should be discussed with the appropriate professional.
The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Independent Financial Services and First National Bank of Pasco and not necessarily those of Raymond James.