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While most people know they must save for retirement to provide an income when they’re no longer working, not everyone understands that financial planning is just as important during the retirement years. You have to think about taking minimum retirement distributions, paying taxes on your retirement income, and planning your distributions while managing your remaining investments.
It’s a good idea to work with a skilled financial advisor to help you sort through the complexities of retirement. For now, we’ll get you started with 5 common mistakes people make with their employer-sponsored retirement plan and IRA, and how you can avoid them.
1. Think about the Second HalfMost people work hard to save as much as possible for their retirement years, taking tax breaks for contributions and selecting investments. That’s incredibly important, but retirement planning doesn’t end when you stop working. This is when the second half begins. After you retire, you want to be just as strategic with your finances.
This includes looking for tax savings and reductions in fees while keeping the proper asset allocation in your investment portfolio. You’ll also need to think about a plan for your retirement distributions. Instead of taking out money whenever you need it, you can allocate different buckets for your retirement or use an annuity to receive a fixed income.
2. Be Strategic about Minimum DistributionsOnce you reach age 72, you will be required to receive minimum distributions from your IRA. If you have several IRA accounts, you don’t have to take a distribution from each one. Instead, you can calculate the combined minimum distribution amount and pull those funds from the account of your choice.
It’s important to be strategic about your distributions. You will have some retirement accounts and assets that need more time to mature, while another account might be ready for your withdrawals. Planning your distributions ahead of time can help you maximize those investment returns while providing an income for the interim.
3. Schedule Roth Conversions to Minimize TaxesWhen you convert your traditional retirement account to a Roth account, you pay income taxes now, but you can enjoy tax-free growth and distributions later. With income taxes rising, it's wise to consider a Roth account and pay taxes while they’re lower.
The problem with Roth conversions is that you have to pay a large amount of taxes at one time. When you have a sizable retirement account, you may have a large tax obligation. But you don’t have to convert the entire IRA at once. Instead, you can break it down into smaller chunks and convert more accounts when your income is lower.
4. Consider Making Charitable ContributionsThere are many other ways to reduce your tax burden. For example, when you’re over the age of 70 ½, you can use qualified charitable distributions to save on taxes. You can transfer up to $100,000 per year to the charity of your choice. This distribution counts toward your required minimum distribution, which you must receive starting at age 72.
5. Work with an Experienced Financial AdvisorYour investments for retirement and your distributions during your retirement are too important to leave to chance. To minimize your taxes, maximize your investment earnings, and streamline your retirement distributions, we recommend working with an experienced financial advisor.
When you meet with your advisor, make sure they have extensive knowledge and experience working with company-sponsored retirement plans and individual retirement accounts. This ensures they can help you select the investments that are right for you and help you manage your retirement income when you no longer receive a paycheck.
When you look for a financial advisor, consider working with an Accredited Investment Fiduciary ® - AIF ®. A fiduciary is a financial professional who can make investment decisions on your behalf. In doing so, the fiduciary must put your interests before theirs, which ensures you get the best possible investment advice.
Even after you’ve invested in your retirement fund, we don’t want you to miss out on planning the second half. We can help you manage your income distributions and retirement account withdrawals, extending your savings and minimizing your tax burden. Call us to schedule an appointment.
-Robert Stachura, CFP®