A Guide To Withdrawing and Using Your Retirement
Updated on: November 2022
Written by: Kelly Koeppel
Although those in retirement can earn their income in a variety of ways — including retirement accounts, benefits programs like Social Security, family, or part-time employment — retirement accounts, in particular, play a significant role in funding your post-work years.
The U.S. Census Bureau found that a majority of those over age 40 have at least one such fund. By the time they retire, the median balance of these accounts tops $87,000. However, this amount is quite modest if you consider that it gets spread out over 15 to 30 years.
Several factors affect retirement accounts. First, there are specific rules and tax requirements for the different fund types. Second, inflation can affect the overall value of the account, requiring you to adjust withdrawal amounts to maintain your standard of living through the years.
Finally, the median balance in retirement accounts shrinks by $10,000 by the time you reach age 75, so ongoing money management is essential to ensure your funds last throughout your life.
Here is a closer look at the issues affecting retirement account withdrawals.
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How Does Withdrawing From a Retirement Plan Work?
More than half of Americans over 40 have at least one retirement account, but the types of accounts vary widely. Traditional Individual Retirement Accounts (IRAs), Roth IRAs, and 401(k)s are savings vehicles for retirement. However, the withdrawal requirements are different for each account type. Mistakes when accessing these funds could lead to penalties or higher-than-expected tax bills.
Here is a look at the differences.
- Traditional IRAs — Also known as simple IRAs, this is the most common form of retirement account. These accounts are attractive because contributions are tax-exempt. However, you will have to pay taxes for your income bracket when withdrawing these funds, and as such, you should show caution when. withdrawing too much in a given year.
- Roth IRAs — Similar to traditional IRAs, Roth IRAs have basic withdrawal requirements. However, there is one important difference: contributions to this account type are not tax deductible. You pay taxes on the funds before depositing them, but the balance and any interest or earnings are tax-exempt when you withdraw them. This factor can make financial planning very different from a traditional IRA.
- 401(k)s — These accounts are employer-funded. In most cases, employers match any contributions you make to the account. Like traditional IRAs, 401(k) funds are tax-exempt when deposited but taxed as regular income upon withdrawal. 401(k)s also have withdrawal requirements similar to IRAs. You cannot save the money in this account forever; you must start withdrawing it after age 72.
Simplified Employee Pension (SEP) plans are also available for small business owners to provide retirement accounts for their employees and themselves. They have the same requirements as employer-linked IRA accounts, but they are ideal for contractors and business people who work for themselves and lack access to a benefits package.
How Old Do I Have To Be To Withdraw Money From My Retirement Plan?
The IRS requires that you be 59 ½ years old to withdraw money from a retirement account. You can make early withdrawals, but the funds will be subject to a 10% early distribution tax in addition to the regular income tax you must pay on 401(k) and traditional IRA money.
The Internal Revenue Service waives this penalty for certain expenses, such as permanent disability or qualifying medical costs. You may be able to prematurely withdraw IRA funds (but not 401(k) money) to put a down payment on a home or to pay for higher education.
You might also consider saving the money in your retirement account to use later in your retirement years. However, once you reach age 72, you must make minimum withdrawals from 401(k) and traditional IRA accounts, according to the IRS. This rule does not apply to Roth IRAs, which you can keep until your death when the remaining balance gets distributed to your heirs.
How Do I Make Sure I Have Enough Retirement Money?
Financial confidence after retirement requires planning beyond when and how much to withdraw from your retirement accounts.
You can begin the process early by contributing the maximum allowable amount to your accounts each year or depositing as much as you reasonably can.
You can maximize the money in these accounts by investing it. The IRS caps annual contributions on these accounts, but once the money is in the account, you can use it to create a diversified investment portfolio. This step can help increase the account value, providing additional income for retirement.
Here are some additional steps to take once you reach retirement age.
A well-planned budget is vital when you are living on a fixed income. You can plan for all necessary expenditures on a monthly or weekly basis. Unexpected expenses may arise from time to time. However, a budget can help you avoid overspending and allow you to time your retirement account withdrawals to limit your tax burden and ensure you have enough money for subsequent years.
You might consider making an emergency savings account so that you can deal with unexpected expenses without upsetting your budget plans or draining your retirement account.
Inflation is one of the more challenging financial aspects of retirement. You are on a fixed income that isn’t going to change, but the cost of living will continue to rise.
To address this, you can steadily increase the amount you withdraw from your IRAs. You can also counteract your increased costs by investing. With an online stock trading platform, you can purchase and hold assets that hedge against inflation, which averages around 3% each year.
Investments may not only make you rich quickly, but they will help you maintain your purchasing power by bringing returns that match or exceed the inflation percentage.
You can also accuminate more investment holdings to add to your will, giving your heirs more assets.
Supplement Your Fixed Income
Another approach is to reduce your reliance on your retirement accounts. The best way you can do this is to get a job to provide supplemental income.
There are different approaches to post-retirement employment. You could seek a casual job that provides modest additional income and the chance for social interaction, or you could look for a consulting or part-time position related to your former profession.
Regardless of your post-career work choice, you can gain supplemental income to take the financial pressure off your retirement accounts.
Seeking post-retirement employment can also benefit your health. Studies have also shown that employment can positively impact mental and physical health after retirement. However, job choice was an important factor in these benefits. The positive effects, which included lower instances of depression and less decline in daily activity, were most evident in part-time jobs and rewarding, non-demanding positions. As such, you should pick a job that is stress-free and the most rewarding to reap all the financial and mental benefits.
With a proper plan for your retirement accounts, inflation, and supplemental income, you can feel confident about the financial aspects of retirement.
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