You’ve Saved It; Now It’s Time to Spend It Wisely

Consider Your Options for Accessing Retirement Funds and Minimizing the Tax Impact

Time can be your nemesis or friend, depending on when you start your journey. The journey is saving for retirement, and research clearly shows the earlier you start the better your chances of having enough money when you need it most. Conservative estimates have shown that a couple, with their anticipated life expectancies, will require more than $260,000 from age 65 on to cover their medical and healthcare-related expenses. According to Barron’s senior editor Reshma Kapadia, “A Kaiser Family Foundation report found that out-of-pocket expenses accelerate with age, with those 85 and older spending more than twice that of a younger beneficiary.”

When you ask people what they fear most, the answer used to be speaking in front of large crowds. But times have changed; the most common response people have now is a fear of outliving their money. Luckily, qualified retirement options exist (ERISA approved) that allow for multiple options and deferred savings amounts that an individual can participate in to save and fund their retirement.

Whether selecting a traditional IRA, participating in a 401(k), 403(b), 457, SEP, Simple, Roth IRA, defined benefit or defined contribution plan, having a thorough understanding of how each can fit into your lifetime income strategy is crucially important. What may be good for a group of doctors, lawyers or other professionals may not be available for staff or other employees. Safe harbor requirements and stringent ERISA rules and regulations mandate how such plans are administered. Fast forward to the time you are ready to stop working so hard and must decide on the best approach to start accessing and spending your retirement assets. This includes taxable and non-taxable assets, proceeds from the sale of a business or home, rental properties, non-qualified annuities, qualified retirement products, pensions, Social Security, etc.

As you can imagine, each client is different. Financial consultants will typically put careful consideration into a client’s tax situation and seek to minimize tax liabilities. Frequent questions include: how can we minimize taxes and maximize what you and your heirs keep? What other sources of income do you have—current, anticipated or possibly inherited? This is all part of an integrated planning process that provides guidance on the most effective strategies for each client’s individual circumstances. Retirement may be a lauded goal, but getting there, keeping and enjoying what you saved, and leaving a legacy involves some effort!

You’ve worked hard and saved effectively—now go spend it! Conventional practice usually suggests the following order of accessing savings: taxable, tax free muni’s/municipal bonds, tax deferred products (401k, IRA, annuity), and Roth IRA, in that order.

For example, in a situation where a client has a large IRA, if you waited to do the “conventional” required minimum distribution (RMD) at age 70.5, the amount received could be enormous and taxable. According to MarketWatch retirement columnist Robert Powell, “RMDs are, of course, the distributions that older Americans must take from their retirement accounts (though not their Roth IRAs) after age 70½. Waiting until age 70½ to start withdrawing money from those accounts could force you to take large distributions that push you into a higher tax bracket.”

Unfortunately, most people just think about the large sum they’ve built up in their 401k/IRA without considering how those distributions will create ordinary income that will be taxed at their highest marginal rate. According to Jessica Blood of Pathwise Financial Group, a more effective strategy can be to maximize Roth conversions before you are forced to take RMDs at age 70½. Similarly, a good estate planning tactic can be to leave as much as possible to heirs in a Roth IRA, where it can be stretched over a much longer lifetime, rather than leaving a large sum in a traditional IRA. Conversely, if you are charitably inclined, then leaving assets in a traditional IRA is a great idea.

Obviously, client-specific factors will determine which strategy is best. But what matters most is having the conversation, considering all the options, figuring out what is best for you and your designated beneficiaries. If you’ve already begun thinking and planning—good for you! If you haven’t, now is a great time to get going on your personal game plan.

H. William (Bill) Wolfson, DC, MS, MPASSM, CFP® is a financial consultant and advisor. Dr. Wolfson retired after 27 years of active practice. He is a member of the American Chiropractic Association (ACA), New York State Chiropractic Association (NYSCA) and Florida Chiropractic Association (FCA). Dr. Wolfson served as the ACA New York delegate and received the prestigious ACA Delegate of the Year Award in 2011. Dr. Wolfson can be reached at (631) 486-2792 or [email protected]. View more published articles at