During retirement, you switch your focus from wealth accumulation to income distribution. You carefully shift spending to support your ideal lifestyle instead of being focused on savings. Now, your income is directly related to how hard you and your portfolio have worked through the past few decades and it’s your time to enjoy the “workless” lifestyle.
With this evolution in mindset and change in lifestyle, it is important to understand some basics of retirement income distribution. Concepts such as minimum distributions, age restrictions, and tax implications will affect what you do and how you do it.
Minimum Distribution and Age Requirements
In general, understand that your required minimum distribution is the minimum amount you must withdraw from your account each year. You will begin withdrawals from your IRA, SPE IRA, SIMPLE IRA, or retirement plan account when you reach 70½.
If you purchased an annuity, you could not withdraw funds during the accumulation period without incurring tax penalties (which is a 10 percent withdrawal penalty on money taken out of a tax-deferred annuity before age 59½). Once you are age 59-1/2 or older, you may generally begin taking withdrawals without additional tax penalties. You will, however, want to review your contract terms to ensure you are not subject to surrender penalties assessed by the insurance company before you take a withdrawal.
Although there is a basic rule of thumb, age restrictions and requirements may vary, so you need to have a complete understanding of the details for each strategy. This is especially important if you have multiple retirement plans since many of the required distribution amounts are set as a percentage of your total.
If you are financially comfortable, upon withdrawal from your retirement plans - or even beforehand - start thinking about charitable/non-profit organizations you want to support through monetary donations. Determine the amount and type of donation that will be best and ensure these donations are tax deductible.
Qualified donations will generally decrease your taxable income. And more importantly, making these donations may help increase your happiness and a sense of purpose by putting you in a position to do something good for a mission or organization close to your heart and interests.
Retirement Income Taxes
Keep in mind that the amount of taxes you will owe in retirement will depend on your income, the type of retirement plan you have, and the timing of withdrawals. Some qualified retirement plans (401ks and traditional IRAs) will provide tax-deferred accumulation and the contributions were made pre-tax.
These plans also offer tax deferral on any growth or gain. In most situations, distributions begin after you turn 70½. At that time, the income distributions are considered regular income and taxes at a standard rate.
For annuities, any earnings or interest earned are not taxed until distributed in either a withdrawal or through annuity payments. The taxable portion of the distribution is treated as regular [ordinary] income. For all retirement strategies, distributions taken before 59½ could have an additional 10 percent penalty tax.
Reevaluate Portfolio Allocations
When you are retired and enjoying the lifestyle you worked so hard to support, remember that it is important to manage your financial strategy now and throughout each stage of your retirement.
Routinely reevaluate your financial strategy to ensure you are maximizing the current income being generated while also positioning yourself to produce ongoing income throughout your retirement.
Investing and managing your finances doesn’t end – it’s an ongoing process leading up to and throughout your retirement.