At 70 1/2 , you have to make retirement decisions

October 28, 2007|By Janet Kidd Stewart

The notion of a standard retirement age may be fading, but there's still one age - 70 1/2 - you really can't ignore.

At that age, owners of most workplace retirement savings plans and traditional individual retirement accounts must begin drawing down those accounts and paying taxes.

You can delay the first withdrawal until April 1 of the next year, but subsequent withdrawals must come out by year's end.

Still working? You can delay taking required minimum distributions in your workplace plan but not in your IRAs. For some, required minimum distributions are moot because they already are taking more than the minimum to pay living expenses.

Others would rather not take them at all. In fact, the requirement was by far the most cited reason for taking IRA withdrawals among people 70 and older in survey data reported in a September paper by Investment Company Institute researchers.

New retirees are sometimes so enamored by their lower tax brackets that they fail to plan for minimum distributions, said William Reichenstein, a Baylor University professor.

"Most people withdraw from their taxable accounts first in retirement, which is good," he said. "But if they're doing that to the extreme, they aren't using all of their low tax brackets when they can."

Take a sixty-something couple in the 15 percent tax bracket bringing in $50,000 in taxable income this year. That meets their expenses, so they haven't touched their IRAs, even though they have been eligible to take penalty-free withdrawals since age 59 1/2 . They might consider drawing $10,000 annually out of their IRAs before they have to take required minimum distributions, Reichenstein said, keeping them within the same bracket.

Drawing down the account today lowers the overall balance, so when it comes time for mandatory withdrawals, they, too, are lower. And that means less chance the minimum distribution will throw you into a higher bracket later on.

Want to do more? Assuming you qualify (with adjusted gross income for married couples or singles under $100,000), you could convert chunks of your account to a Roth IRA, which isn't subject to required minimum distributions, said Robert Keebler, an accountant with Virchow, Krause & Co. in Green Bay, Wis. You would pay income taxes on the withdrawals, but after conversion to a Roth they would grow and be withdrawn tax-free.

"You can put a big dent in your [future] minimum distributions by methodically converting to a Roth," Keebler said.

Through required minimum distributions and elective withdrawals, most retirees will convert substantial amounts of money from tax-deferred to taxable accounts over time, and that creates an opportune time to make sure the right types of investments are in the right accounts, said Kevin Gahagan, a financial planner with Mosaic Financial Partners in San Francisco.

"It's not uncommon for people to have a lot of growth assets like stocks in their tax-deferred accounts and income assets in their taxable accounts," Gahagan said.

Fill those accounts with individual stocks or total market index funds with low turnover to minimize capital gains exposure, said Baylor's Reichenstein.

Just don't forget to balance the overall portfolio according to your risk tolerance. Asset allocation still trumps location, he said.

Have a retirement question? Write to yourmoney@tribune.com, or via mail at Your Money, Chicago Tribune, Room 400, 435 N. Michigan Ave., Chicago, Ill. 60611.

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