Retirees have to start taking RMDs the year after they reach age 70½, but they have some latitude on when exactly in a given year they take those withdrawals, according to this article on Morningstar.com. They can do so early in the year, late in the year or in installments throughout the year. Each approach has advantages to consider. Delaying until the end of the year will enable clients to enjoy more time of tax-deferred compounded growth on the investments. Taking the distribution early in the year, however, ensures they don't forget and risk a 50% penalty; this also removes the possibility that heirs would be left with a tight window to take RMDs if the client dies in a given year. Taking the withdrawals semiannually, quarterly or monthly helps ensure they receive a range of prices for the assets begin sold. Similar to the way that dollar-cost averaging helps ensure that buying decisions are not made at precisely the right or wrong times, taking RMDs in installments guarantees clients will never sell at precisely the right or wrong time. This retains some, but not all, of the benefits of taking year-end distribution.
Retirement savers are not maximizing the return potential of their portfolio if they do not invest in stocks, according to this article on personal finance website Motley Fool. Allocating all their assets in stocks is also a misstep that could be very risky, as they would be severely hit when the market dwindles. Clients also make a big mistake if they do not make the most of the tax-advantaged retirement plans, such as 401(k) and IRA, or they do not factor in the tax treatment of their investments.
More than 94 million Americans are contributing to a defined contribution retirement plans, and the total assets in these accounts exceed $7 trillion, according to this article on Nasdaq, which cites a report from Vanguard. The number of retirement plans with automatic enrollment features has risen by 300%, enabling more than 60% of 401(k) participants to automate their contributions, the report says. While a big portion of 401(k) assets are invested in stocks, more participants hold target-date funds and other professionally managed fund options.
Taxes are a major consideration for new retirees when they start tapping into their retirement savings, as they could pay more in taxes and increase the odds of outliving their nest egg if they don't have a tax-efficient withdrawal strategy, according to this article from Kiplinger. Retirees will be better off delaying their Social Security and pension payouts to allow the benefits to grow. When tapping into their retirement portfolio, seniors should start with tax-inefficient assets and may want to withdraw some funds from their tax-deferred accounts, like a 401(k) plan and IRA, to reduce the required minimum distribution that they will have to start taking when they reach the age of 70 1/2. RMDs are treated as taxable income and retirees might move to a higher tax bracket as a result.
IRA investors should be responsible enough to study the account rules on excess contributions, valuation requirements, prohibited transactions and unrelated business income tax to avoid any issues with the IRS, according to this article from Forbes. Case in point: a business owner made excess contributions to his IRA, for which he owed excise tax and penalties, according to the IRS. The Tax Court sided with the IRS based on the agency's Notice 2004-8, which reminds IRA investors about abusive tax-avoidance transactions.
