This post is part of a series where retirement expert Dan Solin offers simple answers to the ten toughest retirement questions. See all 10.
Q: How should I proceed to withdraw funds I need in retirement?
A: Once you have retired and need to start tapping into your retirement savings, you have a number of options to consider.
You can take a periodic or lump sum check from your 401(k) or similar plan. Or you can rollover your plan into a traditional or a Roth IRA or into an annuity. Each of these options has tax consequences which you should discuss with your tax advisor.
The first place you should look when considering where to start taking withdrawals is the account that will trigger the least taxes.
For example, withdrawals from your Roth IRA will be tax free because you invested with after-tax dollars. While you are still in a higher tax bracket, withdrawing money from your Roth IRA or other non-taxable assets is sound financial planning.
Withdrawals from your 401(k) plan, or from other similar plans, are taxable at ordinary income rates. You should try to defer withdrawing from these plans until you are in a lower taxable bracket.
In planning your withdrawals, you need to be mindful of IRS regulations that require you start withdrawals from tax deferred plans by the time you reach age 70½. There is a complex formula that determines the "minimum required distributions" that you must withdraw from these plans. It might be prudent to seek assistance from your accountant or tax expert to be sure that you do not incur a tax penalty for failure to comply with these regulations.
When you are considering withdrawal options, take a look at the benefit of low cost, "immediate annuities" from providers like TIAA-CREF, Vanguard, Fidelity or Charles Schwab.
Immediate annuities can transform all, or part, of your retirement savings into your own individual pension by providing you (and, at your election, your spouse) with guaranteed income until one or both of you dies. The risk of running out of money is assumed by the provider, leaving you free to enjoy your retirement.
Vanguard offers an immediate annuity that adjusts for inflation, which is worthy of consideration. If you decide that an immediate annuity is right for you (and they are not right for everyone), consult with a tax advisor to determine whether it is best to do so with nonqualified (after-tax) money, or with tax-deferred assets rolled over from an IRA, a Roth IRA or other retirement plan.
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Reader Comments (Page 1 of 1)
8-13-2008 @ 3:06PM
R.A.Muller said...
Mr. Solin,
Already retired, my wife and I, ages 61 & 62, have made several changes to pre-retirement investments which we now handle, and have worked well. However, there is a question on which I hope you can provide advice. We both have had reg. IRA's since '86, which have performed poorly. At this point the death benefits on both are worth far more than the IRA's themselves. We determined to leave them in place for our children to collect if we die prior to age 70.5. (A very realistic possibility) We will never be in a lower tax bracket unless the Feds. make drastic changes. Is it wise to rollover the standard IRA base value, created prior to Roth Ira existence, to a Roth IRA at this late stage? We would lose the death benefit which is twice the value of each current IRA's base value. Rather, should we leave things as they are and let nature take it's course? Or, a third option, begin withdrawing and investing in self managed CD's, etc., again losing the substantial death benefits? Fortunately, we are not in need of the funds, We have pensions which will continue if one of us survives the other, as well as my wife's disability. All of the above have annual COLA increases .
Next, we rarely see the state of GA mentioned in articles re: good vs. bad retirement locations, which we follow closely. We anticipate moving closer to family & friends within a year, but we have resided since 2001 on acreage in GA in an area of intense increased development. We hope to hold this as an investment.
Is it possible to answer the first question re: IRA's, and provide some insight into the logic of maintaining GA as our primary residence with re: to fiscal benefits?
Thank you for your time. Have very much enjoyed and benefited from your articles on AOL. Hope to hear from you in the near future.
With kind regards,
RAM
8-13-2008 @ 5:54PM
Dan Solin said...
I am sorry that I cannot give you advice tailored for the specifics of your personal situation. My best advice would be for you to consult with a financial planner.
I have had good luck referring to the Garrett Financial Planning Network:
http://www.garrettplanningnetwork.com/pages/splash/index.htm
I like them because they charge by the hour and do not push any products on their clients.
I have no association with them.
8-15-2008 @ 9:31PM
john williams said...
I'm planning on retiring and I have an option to take a lump sum. It is a good idea to open up a Roth IRA with that sum. I'll be 591/2 when the retirement goes into effect. I have no other retirement plans beside a pension.
Thank You,
John