Q&A: Avoid running out of money before you run out of breath

Dear Liz: I have two questions regarding the required minimum distributions from retirement accounts at 70½ years old. If I started taking 15% per year at 68, would I still be required to follow the IRS tables and take 27.4% at 70½? Also, can I take the required minimum distributions and roll them into a Roth?

Answer: Please, please, please hire a tax pro before you do anything else. Required minimum distributions can get complicated, and the cost of getting it wrong is huge. If you don’t withdraw enough, you’ll pay a whopping 50% federal penalty on the amount you should have withdrawn but didn’t. If you withdraw too much, you’re paying unnecessary taxes and losing years of future tax-deferred growth.

Which is exactly where you were headed. The IRS table to which you refer does not say you need to withdraw 27.4% of your nest egg at 70½. The 27.4 number is the distribution period. You divide your account balances by that figure to get the amount you’re supposed to withdraw the first year. Think about it: otherwise, your retirement accounts would be emptied within four years.

Even withdrawing 15% a year would exhaust your funds relatively quickly. A sustainable withdrawal rate — one that leaves you a reasonable chance of not running out of money before you run out of breath — is closer to 4%.

There are situations where you might want to start distributions early, even if you don’t need the money. Diligent savers might discover that their distributions would push them into a higher tax bracket if they wait until age 70½ to begin. When that’s the case, it can make sense to withdraw just enough to “fill out” their current tax bracket and pay a lower rate now rather than a higher rate later.

Here’s a simplified illustration. Let’s say a couple in their 60s has a large retirement portfolio and waiting until their 70s to start withdrawals would push them from their current 15% bracket to the 25% bracket. Instead, they might begin taking distributions early. If their current taxable income is around $30,000, for example, they could withdraw as much as $45,900 before being kicked into the 25% bracket, which begins at $75,900 for married couples.

These calculations have lots of moving parts, including different tax rates for taxable investments and for Social Security. That’s another reason to have a tax pro help you run the numbers.

Your pro will tell you that you can’t avoid taxes by rolling required minimum distributions into a Roth. You can contribute new money to a Roth, but only if you have earned income and your modified adjusted gross income is under certain limits. Those limits start to phase out at $118,000 for single filers and $186,000 for married couples filing jointly.

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