Making the Most of IRA Withdrawals

After years of contributing to your IRA, making withdrawals can take some getting used to. We’ve gathered some possible alternatives to help you manage your mandatory withdrawals. Retirement Account (IRA) and required minimum distributions (RMDs).
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You’ve worked hard to plump up your Individual Retirement Account (IRA). But after years of doing your best to grow it, it can be hard to remember the reason you started it in the first place: to use it. 

Even if you don’t feel the need to begin making withdrawals, Uncle Sam has other plans. According to him, once you’re 70½, it’s time to start dipping in and making withdrawals known as “required minimum distributions” (RMDs).

These withdrawals are usually taxed as ordinary income when pulled from traditional IRAs, 401(k)s, or other workplace savings plans. Of course, if your IRA is of the Roth variety, you don’t have to worry about being taxed on withdrawals, as taxes were paid at the outset.

Whether retirement is around the corner or already in full swing, it might be helpful to think through how you’ll use these funds and meet tax requirements before hitting the RMD target age. Maybe you’ll need the dough to cover a change in the cost of living, or perhaps you’ll consider tax-efficient reinvestments for growth. Then again, maybe you’re already thinking of the next generation or charitable giving. There are  resources if you're seeking guidance to help determine your retirement plan, or looking to create some combination from this list:

Go for Ease. Perhaps this form of cash distribution during retirement is what you’ve been planning for all along to cover living expenses. If so, you can arrange to have distribution payments sent on a regular basis to a liquid, easy-access account that provides check-writing, an ATM card, even online bill payment, including automation to a cash management or taxable brokerage account that will make your annual required minimum distribution, well … automatic.

Estate Building. With an estate in mind, it may make sense as you approach age 70½ to convert some or all of a traditional IRA into a Roth IRA. You’ll pay the tax bill up front, and neither you nor your heirs have to worry about it moving forward. You also won’t have to worry about RMDs because they aren’t required for Roth IRAs. This decision requires some thought (and math) because, for instance, if your heirs will be in a much lower tax bracket than your own, it may not make sense to convert. Plus, a Roth IRA is still subject to estate taxes.

For a Cause. Here’s where combo planning comes into play. A Roth IRA conversion and simultaneous charitable contributions may not only help you help the charities you love, but also eliminate the need for future RMDs. In general, the goal is for the donation to help reduce taxable income by the same amount that the conversion increases it, leaving you with little or no tax impact.

But put some thought into this thoughtful gesture. Generally, anyone age 75-plus may not want to convert to a Roth IRA to offset a large donation. Typically, the most tax-efficient asset to leave to charity at death is a traditional IRA. That’s because the charity does not pay income tax and the charitable bequest is deductible against an investor's taxable estate.

With today’s technology, withdrawing from your IRA doesn’t have to be complicated. From figuring out your RMD amount to deciding what you want to do with it, there are resources available to help you determine how and when to make your RMDs, so you can focus on enjoying retirement.

The information presented is for informational and educational purposes only. Content presented is not an investment recommendation or advice and should not be relied upon in making the decision to buy or sell a security or pursue a particular investment strategy.


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