When you first begin investing in a traditional 401k plan or IRA, very little is said about how your savings will be handled in retirement. Your focus regarding your retirement plan from the start is on how much to contribute, the tax savings, the investment choices and the necessity to change your investment allocation over time. Therefore, without a doubt, it might be surprising for you know that you have to make IRA minimum withdrawals from these accounts when you attain the required beginning date.
Amazed? That's right -- the moment you reach age (presently 70½ ) you have to start making the yearly IRA minimum withdrawal from the savings that you built over your whole life. It is possible that you don't need this money to fulfill your retirement financial requirements. Therefore, is it possible to avoid taking the required IRA Minimum withdrawal and allow your savings to continue to grow intact, tax deferred?
Unfortunately, the short answer is that it's very difficult to avoid making IRA minimum withdrawals, although you do have a few options.
One option is a Roth IRA conversion for a part or all of your retirement savings that you hold in traditional 401k accounts and IRAs to Roth accounts. The traditional retirement savings plans differ from Roth accounts in that the Roth accounts do not have IRA minimum withdrawal requirements for the owner, or if deceased, for the spouse.
The option of converting your funds to a Roth retirement plan may not be practical by everybody as a means to evade the yearly IRA minim withdrawal. When you transfer your money from your conventional account to a Roth, you are liable to pay tax on the account balance. For example, say you have a $100,000 traditional IRA it and you fall in the tax bracket of 25%. You will need $25,ooo of available cash (plus state income tax) in order to convert your conventional IRA to a Roth IRA. Also be aware that the moment you move your money into a Roth IRA, you have waiting period of five years to eliminate taxation on withdrawal of any earnings. (However, you can withdraw all your entire principal amount, tax free).
IRS provides another window of opportunity. If you're still working at age 70½, you can postpone taking your withdrawals from your qualified retirement plan e.g. 401k or 403(b) until the 1st of April of the year after you retire (assuming you don't own more than 5% of the company). While this delayed withdrawal applies to the employer sponsored plan of your current employer, it will not apply to other 401k accounts left with previous employers or IRAs.
If you find that you have reached the age of required IRA minimum withdrawals and don't want to spend the money, here are some investment options.
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