Retirees should reconsider strategies on IRA, 401(k) withdrawals A government rule on retirement savings may be tricking retirees into looking at their financial situations all wrong. The rule says retirees can’t leave money in their IRA or 401(k) accounts forever. At age 70½, they must begin making minimum withdrawals, even if they prefer […]
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Retirees should reconsider strategies on IRA, 401(k) withdrawals
A government rule on retirement savings may be tricking retirees into looking at their financial situations all wrong.
The rule says retirees can’t leave money in their IRA or 401(k) accounts forever. At age 70½, they must begin making minimum withdrawals, even if they prefer to leave the accounts untouched.
You are forced to take money out whether you want to or not.
And in reality, you should want to take out as much as possible. That’s why I liken the rule to a head fake because it causes retirees to look at the situation from the wrong perspective.
They get fixated on that minimum amount they must withdraw, so that’s how much they end up withdrawing, leaving the bulk of their savings right there in the 401(k) or IRA.
That’s a mistake, especially for people who hope to leave a healthy inheritance to heirs.
If you keep taking out the minimum amount each year, it will just about guarantee you have a large amount in there at your death. Under the current tax law, if you die and your IRA or 401(k) is left to your heirs, they are taxed on it at a high rate. With state taxes added in, it could be 40 to 45 percent.
The percentage could end up being even higher, depending on when you retire and whether tax laws change.
If Congress and the president raise taxes, the government’s share of your retirement savings would go up and the amount left to heirs would go down.
That’s where it would be good for the middle class to take a lesson from wealthy retirees, who are less likely to fall for that head fake. They understand that they need to withdraw greater chunks from their IRA and 401(k) accounts, placing the money in tax-friendlier accounts.
While people in the middle class take out the minimum-required amount, the rich do the exact opposite.
Retirees have a few strategies they can take advantage of to make sure taxes don’t deplete their legacy to their children. You have to put these strategies into place early, though. The longer you wait, the less effective they are and the less your savings will be.
• Explore tax-free options. Move the money into a tax-free vehicle, such as a Roth IRA or a specially designed life-insurance plan that would allow the dollars to flow tax free to heirs. One additional advantage with the life-insurance option is that, historically, when laws are changed related to life insurance the old policies are grandfathered in and not affected. It’s a top estate-planning trick for the rich. The challenge is the middle class doesn’t know it exists.
• Stretch-out inherited IRA withdrawals. Under tax law, when your heirs inherit an IRA, they don’t have to take money as a lump sum. They can have it paid out over their lifetime, which could keep them in a lower tax bracket. They pay taxes only on what they take out. There is a gamble involved with this plan. You are gambling that the law that allows heirs to do this will still be in effect when you die. Many people think this law is one of the easiest ones to change because the government could just claim this is a tax loophole and say it is simply closing the loophole.
Ultimately, it will pay off to sit down ahead of time to review options with a financial advisor who understands the intricacies of retirement planning.
You don’t want to be taken in by that head fake. You want to make sure you and your family get as much benefit as possible from all those years you were saving your hard-earned money.
Dave Lopez is founder of ILG Financial, LLC (www.ILGFinancial.com). Lopez, who was a mathematics and computer science major, applies his analytical mind to specialize in retirement planning. Lopez is an investment-advisor representative of AlphaStar Capital Management, LLC, a registered investment advisor.