When you decide you are ready to retire, you may want to start withdrawing funds from your retirement account(s). You will need to be a minimum age of 59½ before you are allowed to do so without penalty. If you have reached the age where you need to take out required minimum distributions (RMDs) (70½ in 2020 or 72), you will have to decide how much you want to take out—and when. If you are not careful, it is easy to make mistakes in the calculations.
Here are some guidelines that may help you decide the best age to retire and determine how large of an RMD you need.
The Internal Revenue Service requires that you start making withdrawals from retirement accounts after you reach a certain age. If you do not make them, or if you do not withdraw the minimum amount required, that amount will be taxed at 50 percent.
Calculating Your Required Minimum Distributions
Every year, the IRS determines how many years you should use to calculate your RMDs. You can find an RMD table at SmartAsset. The number of years is based on your life expectancy after you reach age 72 (or older if you are still working). If you reach the RMD age of 72 this year, you will divide your account balance by the number of years remaining from the chart. The result reveals the minimum you need to take out each year.
It can be a big decision to decide how much you want to take out each year: whether you should take out the minimum or more. Your distributions can come in several forms. You can be paid monthly, quarterly, annually, or even get a lump-sum amount. You also can change the amount you get at any time—it’s your money (except the taxes).
Even though you choose when and how you receive the money, there are some mistakes you want to avoid. These mistakes could cut the amount of money you get by half in the long run. Getting the most money out of your retirement accounts (or for your heirs) requires following a strategy for your RMDs.
Do Not Take Too Little Money
JP Morgan Chase conducted a study to determine what 31,000 people did when they reached their RMD age. The bank discovered that most of these people—84 percent—only withdrew the minimum amount. Other retirees (80 percent), who were not yet RMD age, had not yet taken any distributions from their retirement accounts.
These facts showed that these seniors probably did not have a sufficient amount to live comfortably during their retirement years. It also revealed that they wanted to preserve their cash assets until later in retirement.
A problem with only withdrawing the minimum amount is that retirees typically spend more in their earlier years of retirement. Because health problems occur more frequently while you age, seniors typically spend less later. Understanding this, seniors should draw out more than the minimum in their early retirement years and enjoy life a little more.
Do Not Claim Social Security Too Early
Even though you reach Social Security retirement age after you turn 62 and can start getting Social Security benefits, each year you wait beyond that age, the more money you will receive. You get the maximum amount possible after you turn 70, which is the full retirement age.
Waiting as long as you can until age 70 before receiving benefits makes a big difference in how much you will receive. Every two months you wait, there is a percentage increase (a total of 8 percent per year), as seen on the Social Security Administration’s website. Instead of taking the benefit as soon as possible, it makes more sense to wait and get the maximum amount—enabling you to live more comfortably during your retirement years.
You will also not have to depend on RMDs as much. Leaving money in your retirement accounts—except for RMDs—enables your money to continue to grow.
Transfer Your Money to Avoid RMDs
Before required minimum distributions are required, you can rollover your money into an account that does not require RMDs. This move would enable your money to keep growing and remain tax-free as long as it remains in the account, and lets you pass on the maximum amount to your beneficiaries.
A Roth IRA is the only retirement account that will let you do this. It has no RMDs.
Avoid Taxes on an RMD With a Charitable Distribution
An alternative way to avoid taxes on an RMD, says Schwab, is to make a charitable contribution to a qualified organization. A direct transfer to the charitable organization will enable you to escape any taxes that may be due from your RMD. You will not be able to claim it as a charitable deduction, and it will not count as part of your income.
Live on Money From Stocks and Bonds First
If you have stocks, mutual funds, and other investments, you may want to live on them and only take out the minimum amount of your RMD withdrawals until depleting them. While you have other sources of potential income, use them before taking more money out than necessary to let your retirement account continue to grow.
Annual Withdrawals May Be Better Than Monthly or Quarterly
When you make your first RMD, you must make it before April. In the years following, you can choose to get it anytime before December.
As with any account that builds interest, the longer you leave more money in it, the faster the interest grows. If you want to build a larger sum for your beneficiaries, SmartAsset suggests you may want to think about taking out your RMDs in December rather than monthly or quarterly.
SmartAsset also mentions that if you do the calculations yourself, and choose monthly withdrawals, it is easier to miscalculate and not take out enough money to meet your RMDs for the year. Using a professional can help you avoid this mistake.
These tactics can enable you to get more money in your retirement accounts. Getting professional help will enable you to avoid mistakes with your RMDs, and grow even bigger retirement accounts to use in your retirement years and pass on to your heirs.
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