Nobody likes surprises, especially when it comes to the subject of money! When I work with mid-life professionals thinking about career transition and/or retirement, they are often surprised to learn that they will eventually be forced to withdraw money from their Traditional IRAs and Traditional 401(k) plans later in life.

That is correct! The IRS requires individuals to begin withdrawals from those accounts at age 72, often called “Required Minimum Distributions” or “RMDs”. The age 72 requirement is an improvement from the previous RMD age of 70½, which was changed as part of “Setting Every Community Up For Retirement Enhancement Act of 2019”, or SECURE Act as it is now often called.

The 2019 RMD rules are mainly good news for those with retirement accounts. They provide you with the option of trying to maximize growth potential of these retirement accounts. However, that does not mean that each person should default to waiting until age 72 to begin those withdrawals. That decision should be based on each person’s circumstances.

Some decisions about withdrawals are straightforward. If you continue to work to age 72, maximizing the chance for growth in these accounts by not taking distributions will almost always make the most sense, especially because distributions from Traditional IRAs are taxable. The opposite scenario of no longer working before age 72 and having no or minimal income sources outside of your Traditional IRA or 401(k) plan assets is also uncomplicated. You would very likely need to tap into these accounts to pay your living expenses.

However, other situations are more complicated. If you have retired at age 62, should you make the decision to claim Social Security benefits to reduce the IRA withdrawals? Or should you wait to claim Social Security benefits at a later age (for a higher benefit) and take more out of your retirement accounts? There are trade offs, including tax considerations, to consider which I discussed in a blog last year.

What about other savings accounts held outside of a Traditional IRA or 401(k) Plan? Should you draw down those assets first, before starting IRA or 401(k) distributions?

There is no one “right” or “wrong” answer to these questions, but they are important. Each option involves trade offs that are unique to each individual or family. Guessing or just deciding based on intuition may be far from a good choice and may have the potential to compromise your retirement plans.

That is why I urge each person to project their income and expenses to evaluate the implications and trade-offs with different choices. The time when we are in are 60s is often a period when household cash flows may often change due to the timing of when certain income streams and expenses begin and end. They can have a great impact on income tax planning, investment strategy, and other important financial planning opportunities.

Last year, I wrote an article about how this kind of planning can really help simplify decision-making as we go through a time of career transition and retirement planning.

And guess what? There might likely be more changes about these Required Minimum Distributions. Congress is looking at legislation that may again change the age of when these withdrawals will need to commence. I will be writing about these proposed rule changes in my next blog.

In the meantime, please contact my office if you have any questions about how to approach this kind of planning or about your situation.

Contributions to a Traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 1/2 may result in a 10% IRS penalty tax.

Itineris Financial Advisors and LPL Financial do not provide tax services. Please consult your tax advisor concerning your specific situation.