Retirement Income Replacement Plan

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Covid-19 has created multiple challenges for how we live, work and invest. For those close to or in retirement the pandemic has impacted their emotions around money, lifestyle expectations, and how much to withdraw from their accounts. Through the ups and downs of different types of investments it is best to focus on what you can control and follow these general withdrawal strategies during retirement.

Lowest Tax Rate Accounts

Keeping your taxes low is everyone’s top priority. Depending on the type of accounts your wealth is in will determine the taxes you owe and the order you take money out.

Factors include your expected spending throughout retirement, where your fixed income originates (Social Security, pension, etc.), whether your money is in a Roth account or not, and potential capital gains from non-retirement accounts. Know how close you are to the next tax bracket each year to help avoid a higher tax bill.

New Required Minimum Distribution (RMD) Rules

Before the SECURE Act took effect in 2020, the age at which you needed to withdraw required minimum distributions from your IRA and other retirement plans was 70 1/2. For those turning 70 ½ in 2020 and beyond, you are not required to withdraw from certain retirement accounts until you are age 72. RMDs are important to complete because you will face a 50% penalty on any amounts you fail to withdraw.

Roth IRA Conversions

Depending on your tax bracket from year to year, you should consider converting money from a Traditional IRA to a Roth IRA. Conversions allow you to move partial amounts over multiple years or to move the full value inside Traditional IRAs over to the Roth account. Roth accounts are great because you don’t pay taxes on withdrawals. This strategy makes sense if you expect to be in a lower tax bracket that year or the government is set to raise taxes.

Qualified Charitable Distribution (QCD)

Direct contributions to your charity of choice are a great choice to come from your IRA. QCDs allow you to donate up to $100,000 to charities without paying taxes. Money in a Donor Advised Fund (DAF) is deductible in the year it was contributed to the fund and then grows tax-free in a variety of investments (similar to the money put into an IRA). At a future time, you decide when and where to donate that money.

Using either of these strategies provides greater flexibility for managing your taxes and helps support organizations you believe in.

Make In-Kind Withdrawals for Your RMDs

This strategy allows you to move a specific investment from your IRA over to a non-retirement, taxable individual account without selling. You don’t avoid paying income taxes on these distributions, but it moves it over to an account to potentially grow in the future and then be taxed on the capital gains. That can be a huge incentive if you qualify for the 0% capital gains rate. Reasons you might decide to make in-kind withdrawals include the investment may have fallen recently but you believe it has long-term potential or you just don’t need the cash right now.

Health Savings Account (HSA)

HSAs provide a triple benefit

  1. Tax deductible contributions

  2. Tax-free growth

  3. Withdraws for qualified expenses are tax free

In retirement, HSAs help maintain your cash flow plans by paying for those unexpected medical bills. Another important benefit is being able to make withdraws in the amount of non-reimbursed expenses as long as you have receipts to back it up.

Retirement goals and the execution of a plan is unique to each individual. That is why it is so important to have a sound withdrawal strategy designed with input from three groups.

  1. The client

  2. The financial advisor

  3. The CPA

Together, with all that information, a plan will develop to help limit taxes and extend the life of your assets in retirement. Then your vision of retirement is more likely to be realized.

Additional retirement resources to review

Christopher Peterson is a Certified Financial Planner™ professional, NAPFA member, fee-only financial advisor and provides fiduciary advice to his clients. Peterson Wealth Advisory was established in 2008.