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.
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.
for thinkMoney ®
Financial Communications Society 2016
for Ticker Tape
Content Marketing Awards 2016
Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type.
Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
The information contained in this article is not intended to be individual investment or retirement planning advice. It is for educational and illustrative purposes only.
TD Ameritrade does not provide tax advice. We suggest you consult with a tax-planning professional with regard to your personal circumstances.
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.
TD Ameritrade, Inc., member FINRA/SIPC, a subsidiary of The Charles Schwab Corporation. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2021 Charles Schwab & Co. Inc. All rights reserved.