New York Estate Planning & Elder Law Blog
Comprehensive financial planning is an intricate, multistep process that often goes hand-in-hand with comprehensive estate planning. There are many different financial planning options available to you when you begin thinking about planning for your retirement, and it is never too early to start looking into them. One of the most commons options people choose in planning for retirement is the establishment of a retirement account like an IRA or 401(k) plan. A recent article from The Motley Fool discusses three common missteps people make when approaching their retirement account withdrawals.
Waiting Too Long
The United States Internal Revenue Service requires minimum distributions from retirement accounts after age seventy and a half. However, that does not mean you need to wait until then to start taking these distributions. In fact, doing so could actually cause you unintended financial harm. By the time a person is seventy and a half, they have likely amassed a good deal of savings in these retirement accounts.
Waiting until that age to start taking distributions can cause those distributions to be so large that it actually pushes retired individuals into a higher tax bracket. Most retirement accounts allow you to begin taking distributions at age fifty-nine and a half, so it is important for you to keep a watchful eye on your retirement account balances and engage in some math that will help you understand the tax implications your minimum distributions might have on you and your family.
Mismatched Withdrawals and Spending Needs
It is certainly no secret that you must pay for the things you need in life. This is true even in retirement, and it is important to have a firm understanding of what your financial needs will be during your retirement years. Doing so can help you make sure you are financially prepared and make the correct decision when determining your retirement account distribution amounts.
Make sure to spend time creating a detailed budget of your anticipated expenses, including the potential cost of increased healthcare. When you are determining your distribution amount, factor in all of your expected costs and make sure to leave enough room to provide you with the flexibility to handle unexpected financial obligations or pay for the trip that you have always wanted to take with your spouse. If you find yourself dipping into your financial wiggle room, make sure to take proactive steps to replenish it so that you can continue to live without adding financial stress on top of your everyday responsibilities.
Ignoring the Tax Implication of Withdrawals from Multiple Accounts
Many individuals will find themselves with multiple accounts, either as individuals or in combination with their spouse. Some of these accounts may have vastly different tax consequences that can have a significant impact on your estate plan. Taking withdrawals from taxable accounts will allow your tax-free account investments to continue to grow. Electing to take withdrawals from a tax-free account first might help you offset some of the taxes associated with social security and other aspects of retirement, but it will also diminish your ability to leave a tax-free asset to your heirs should you pass with money remaining in these accounts. An experienced estate planning attorney can help you understand the various taxes associated with all types of retirement assets and can help you develop a comprehensive estate plan that makes sure to address tax consequences.