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“So you’re retired. Now what?”

Most qualified retirement plans offer significant tax benefits – if you’re willing to follow a few IRS-specified rules, that is. The federal government wants to make plans such as 401(k)s, Keoghs, SEP-IRAs and traditional IRAs available for specific needs, and has enacted laws to help eliminate potential abuses of these tax-advantaged investment alternatives.

Retirement Plans are Intended for Retirement

Retirement_WithdrawalsFor one thing, the government wants to make sure that such savings (and income tax benefits) actually go towards providing retirement income. Stiff penalties for early withdrawal help encourage investors to hold off on receiving income from qualified plans until their retirement years.

Required Withdrawals

The government also wants to make sure they can someday tax these accumulated funds. If you have a 401(k), a Keogh, a SEP or a traditional IRA, you must begin taking mandatory minimum distributions from your plan by April 1st of the year following the year in which you turn 72.

Although the tax code allows you to wait until April 1 of the year following the year you turn 72, it is generally a good idea to take your first mandatory withdrawal in the same year you reach that age. If you wait, you will have to make two withdrawals in the first year, doubling the amount of taxable income you must declare and potentially increasing your marginal tax bracket.

The amount you are actually required to withdraw each year, and which will be subject to taxation, is based on tables that estimate your remaining lifetime.

Calculating Your Required Withdrawals

It’s vital to maintain a disciplined process of taking minimum withdrawals from your qualified plans. That’s because if you don’t meet the required minimum distribution withdrawals, the IRS will impose a stiff penalty: 50% of the amount not withdrawn, plus the income taxes due. Ouch!

The good news is. the IRS has made calculating your required minimum distributions much easier. Based on your age, you simply divide your qualified plan balance as of the last day of the previous year by the factor from the IRS Pub. 590 table shown below. The resulting quotient is your annual required minimum distribution.

Uniform Lifetime Table

(For use by: unmarried owners, married owners whose spouses are not more than 10 years younger, and married owners whose spouses are not the sole beneficiaries of their IRAs)

AGE Distribution Period
70 27.4
71 26.5
72 25.6
73 24.7
74 23.8
75 22.9
76 22.0
77 21.2
78 20.3
79 19.5
80 18.7
81 17.9
82 17.1
83 16.3
84 15.5
85 14.8
86 14.1
87 13.4
88 12.7
89 12.0
90 11.4
91 10.8
92 10.2
93 9.6
94 9.1
95 8.6
96 8.1
97 7.6
98 7.1
99 6.7
100 6.3
101 5.9
102 5.5
103 5.2
104 4.9
105 4.5
106 4.2
107 3.9
108 3.7
109 3.4
110 3.7
111 2.9
112 2.6
113 2.4
114 2.1
115 and over 1.9 1.9

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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Should I convert to a Roth IRA?

Should I convert to a Roth IRA?

The Roth IRA offers many advantages over its traditional counterpart. Should I convert to a Roth IRAThese include:

  • Tax-free distributions at retirement
  • Ability to continue making contributions beyond age 72
  • No required minimum distributions beginning in the year you turn 72
  • Leaving assets to survivors that are free from income taxes (more…)

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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Bridging the Income Gap

Social Security was never designed to be an individual’s sole source of retirement income. Instead, it was meant to bridge the gap between people’s income from pensions and savings and their monthly expenses.

income_gap-880x600

Today, however, nearly two-thirds of all seniors rely on Social Security for at least 50% of their total monthly income. Nor are annual cost-of-living adjustments, or COLAs, keeping up with the spiraling costs of healthcare, housing, and energy in many areas across the country. Adjustments to extend the program’s solvency have reduced benefits in real terms, as well as ratcheted up the age at which one can attain full benefits.

What’s more, traditional company pension plans are fast going the way of the horse-and-buggy and the dodo bird. Instead, employers are moving toward “defined contribution plans” that put most of the responsibility for planning, funding, investing, and distributing plan funds squarely on the shoulders of individual employees.

Given these trends, one thing is clear: Each person must put increasingly greater emphasis on helping to securing their own financial future in retirement. Your actions today and throughout your working career may make the difference between relying on government programs for a modest monthly income and enjoying a more secure and independent “golden years.”

The price of procrastination is steep and the cost of inadequate preparation too high for you to wait until later to start planning!

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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