Having invested savings in a traditional retirement account, you might not be surprised to find out that the US government won't let you keep your money there forever without paying IRA taxes. When you reach age 70 ½, you are be required to start taking an IRA minimum withdrawal from your account (you'll pay a hefty50% penalty if you don't). The calculated amount of the IRA minimum withdrawal is per an IRS formula that includes your account balance (from December 31 of the prior year), your age and your life expectancy. You will get a notice from your IRA custodian when it's time to take your IRA minimum withdrawal but it's your responsibility just in case you don't get the notice.
Some people are fortunate in that when it comes time to take the forced IRA minimum withdrawal, they don't need the money. They would rather leave it grow, tax–deferred. The following are options for handling these funds:
1. Reinvest your IRA minimum withdrawal. Technically, you can't rollover your IRA minimum withdrawal to another tax-advantaged retirement account, but you can invest these funds in a regular non-retirement brokerage account. By keeping these funds at work, you will hopefully continue to have them grow, albeit on an after-tax basis.
While it's true that stock market investments are best for those who have a long time to let their investments grow in value, those who have only recently reached the IRA minimum withdrawal age of 70 ½ might find themselves with 20-30 years of life remaining.
2. Invest the funds in bonds. In this post-crisis economic environment, traditional savings accounts are typically offering less than 1% interest rates – mere pennies on the dollar for funds invested in these accounts. However, significantly higher interest rates can be had through bonds. Build America Bonds yield over 7% and these might have a safety profile you will be comfortable with. To help decide on an investment allocation, read about investment buckets.
3. Donate your IRA minimum withdrawal or spend it on friends and family members. If you're financially sound enough that you don't need your IRA minimum withdrawal for living expenses, it's because you've made smart financial decisions that allow you to feel secure in your retirement savings. So why not spend your IRA minimum withdrawal on something that gives you pleasure? Maybe it's a cause you care about, a trip you've always dreamed of taking or a gift to a grandchild who's just beginning college. You've earned the right to have an 'emotional return' on your money, so spend your IRA minimum withdrawal on something meaningful in your retirement.
Lose a Fortune on Your 401k Rollover
If you do not do any of these correctly:
- Opt for a distribution rather than direct transfer
- Rollover company stock to an IRA
- Choose to rollover to a Roth IRA
- Rollover to your new employer’s 401k
- Rollover post-tax contributions