Understanding Required Minimum Distributions

The idea behind required minimum distributions, or RMDs, is that the government wants
to give us a tax incentive to save for retirement – but they also want to make sure we don’t
misuse it. So, if we’re in the 30% tax bracket and we put money into a tax deductible IRA or a
401k, each dollar we put in really only costs us 70 cents because it’s a before-tax contribution.
So the government is helping us save and that’s nice. However, it’s also true that the government
really wants this to be retirement money. In other words, they don’t want it to be money that you
never spend or leave for your heirs. They want to make sure you pay tax on it eventually.

IRAs are one example of a use-specific plan, which the government loves. The 529
college tuition plan is another example; it’s extremely tax-efficient for the investor if used for
college, but extremely tax-inefficient if used for retirement. Similarly, IRAs are designed to
encourage people to save money for retirement, and if the money is used for that purpose then
it’s taxed in a friendly manner. If it’s used for anything else, it’s not….

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The Importance of Strong Financial Defense

The great Alabama coach “Bear” Bryant once said, “Defense wins championships,” and you can bet every great coach in every sport has shared that same philosophy. Just think about some of the great sports dynasties, teams that won championships year after year: The Green Bay
Packers under Vince Lombardi, the Boston Celtics under Red Auerbech, the Yankees under Joe Torre…you could go on and on. All of these teams knew how to score, yes, but they all started with the premise that a strong defense made their offense better. Strategically, they knew how to win games, but they focused first on strategies that ensured they wouldn’t lose games.

Why is that same approach so critical when it comes to your finances and, in particular,
saving and investing for retirement? Well, it’s simply because when you’re talking about your “life savings”, losses can potentially have a huge impact on your life! How huge? Well, consider the fact that if you have all or most of your investments in the stock market and your portfolio loses 50 percent of its value, you need to regain 100 percent of it in order to break even; that takes time, and depends on the market not dropping again…

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Are Your Allocations Right for RMDs?

Making sure your IRAs are allocated properly for required minimum distributions
(RMDs) once you reach the age at which you must take them is as simple as following a bit of
advice your parents probably used to tell you: live off your interest, don’t touch your principal.
That may sound simple enough, but there are many factors to consider in order to ensure the
interest and dividends you’re generating from your savings and investments is sufficient to cover
your RMDs and satisfy your other income needs throughout retirement.

Again, RMDs are distributions the IRS requires you to make on your retirement savings
each year after you’ve reached age 72. The amount changes each year in conjunction
with your estimated life expectancy and the balance of your IRAs and other qualified plans as of
December 31st the preceding year.

Ideally, an asset allocation right for taking RMDs should be able to generate at least 3.7%
dividend or interest. If your interest and dividend income isn’t sufficient to cover RMDs, then
the distributions will most likely have to come from principal. Why is that so bad? Well, with
average life expectancy rates today higher than they’ve ever been, most people need to plan for
30 years of retirement. That being the case, spending any principal at all, especially during the
early years of retirement, can be a slippery and dangerous slope….

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All written content on this site is for informational purposes only. Opinions expressed herein are solely those of McCartin and Associates and our editorial staff. Material presented is believed to be from reliable sources; however, we make no representations as to its accuracy or completeness. Investing involves risk. There is always the potential of losing money when you invest in securities. Asset allocation, diversification and rebalancing do not ensure a profit or help protect against loss in declining markets. All information and ideas should be discussed in detail with your individual advisor prior to implementation. The presence of this website, and the material contained within, shall in no way be construed or interpreted as a solicitation or recommendation for the purchase or sale of any security or investment strategy. In addition, the presence of this website should not be interpreted as a solicitation for Investment Advisory Services to any residents of states where otherwise legally permitted to conduct business. Fee-based financial planning and Investment Advisory Services are offered by Sound Income Strategies, LLC, an SEC Registered Investment Advisory firm. McCartin and Associates and Sound Income Strategies LLC are not associated entities. McCartin and Associates is a franchisee of the Retirement Income Store. The Retirement Income Store and Sound Income Strategies LLC are associated entities. © 2023 Sound Income Strategies

IRA Conversions

The Roth IRA offers a number of advantages over its traditional counterpart. These include:

  • Tax-free distributions at retirement
  • Ability to continue making contributions beyond age 70-1/2
  • No required minimum distributions beginning in the year you turn 70-1/2
  • Leaving assets to survivors that are free from income taxes


Details on eligibility to convert a traditional IRA to a Roth IRA.

  • For years before 2010, if your filing status is married filing separately, you don’t qualify unless you lived apart from your spouse for the entire year.
  • For years before 2010, if your modified adjusted gross income is greater than $100,000, you can’t convert a traditional IRA to a Roth IRA.
  • For years before 2008, direct conversions from an employer plan to a Roth IRA were not permitted. You can do that now, but in some situations it may be preferable to roll to a traditional IRA and then convert to a Roth IRA.
  • If you inherited a traditional IRA from a person other than your spouse, you can’t convert it to a Roth IRA.
  • You can convert a traditional IRA to a Roth IRA even if you made a rollover within the previous 12 months.
  • If you’re otherwise eligible, you can convert part of a traditional IRA to a Roth IRA. But you can’t convert only the nontaxable part.

Assets converted to a Roth IRA must remain in the account for at least five years before any distributions are taken. Otherwise, a significant tax penalty may apply.

You’ll maximize the potential for tax-free income later if you pay conversion taxes out of pocket, rather than withdrawal them from your IRA. If you can’t pay conversion taxes without using part of your IRA funds, you probably shouldn’t convert unless you are certain you will be in a high tax bracket during retirement.

Non-Stock Market Income Generating Alternatives

There are three basic categories of investments: conservative, moderate and

alternative investment types

Aggressive instruments are those primarily invested in for growth. As the chart shows, they include things such as common stock, stock mutual funds, speculative real estate and commodities. Again, these are typically invested in for growth or capital appreciation, not income. They’re considered “aggressive” in part because it’s a simple fact that sometimes when you invest for gains you get losses instead – or that growth sometimes ends up being shrinkage.

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