The first wave of baby boomers started turning 70.5 in July 2016, and over the next 18 years roughly 10,000 boomers per day will hit this milestone. But why is this age an important one for retirees? Once you reach age 70.5, you have to begin taking the required minimum distribution (RMD) annually from your Individual Retirement Account (IRA). It’s important to consult with an investment advisor and tax professional closely to review each unique situation for withdrawing assets.
Cash flow planning
It’s critical to consider overall cash flow planning when drawing down on assets in retirement. Prior to reaching the age for RMDs, the best way to consume capital is to spend after-tax money first, IRAs second and Roth’s third. However, that changes when you turn 70.5 because you’re required to take money out of a retirement account. After age 70.5, an RMD should be used to satisfy the immediate cash flow needs in that year for income. If you have cash flow needs above an RMD, then you can go back to your personal funds.
If you don’t need an RMD
If you must begin taking an RMD, but don’t need it for cash flow, there are three popular options to consider. First, you can simply move the money to your personal portfolio and reinvest it. The second option, if you are charitably inclined, is to gift that money directly to a charity and claim the usual tax benefits of a charitable donation. A third popular option is to use excess cash to fund a child or grandchild’s 529.
Mistakes to avoid
One of the biggest mistakes is to not keep up with taking the distribution. At Fort Pitt, we are very diligent with keeping track of RMDs for clients. The penalty for not taking distributions are substantial, so make sure you keep track and take it annually.
Taking more than you have to for an RMD is also another mistake that those planning on their own may make. When taking an RMD, it is advantageous to take only the minimum, as it can help save a few thousand dollars on tax. Delaying distributions as long as possible is the best way to compound wealth over time.
If you are still working at age 70.5, you will need to take distributions from an IRA account, but you may not need to take from your 401(k) if you are gainfully employed. This is a unique situation that needs to be discussed with your team of tax and investment advisors.
Be sure to plan distributions strategically to maximize the best tax benefit. There can be great strategies for both monthly distributions due to dollar cost averaging, verses lump sums throughout the year.