Retirement Plan Required Distribution Strategies

Rare people with pensions today are lucky in more ways than one. In my experience, with a pension you are paid a certain amount of money, usually monthly and the pension usually has a cost of living increase feature. Pensions are simple for the pensioner to figure out. They just have to decide if they want taxes withheld and if they want to take advantage of any survivor annuity clause. Then they just set up their automatic deposit to the bank and the money rolls in. Nice.

Of course if the pensioner dies and his/her spouse has passed along, there usually are no further payments. Any money you originally contributed may be paid out to your hers, but that is probably a relatively small amount.

IRAs and 401Ks can be more complicated when you are trying to figure out how to draw out your money. There are as many scenarios as there are people in the plans, and each scenario may benefit from different draw down strategies.

My scenario.

In my case, I have a traditional IRA, funded from a 401k roll over when I took early retirement, and none of the funds have ever had taxes withheld. We are lucky in that we anticipate no actual need from the funding, but I will have to start taking distributions in 7 years – because Uncle Sam will charge me a fee if I don’t (required minimum distributions start at age 70 ½ and the amount you have to take out depends on your life expectancy and the amount you have in all retirement plans except Roths and pensions).

Since we don’t anticipate needing to use the funds to live, at least one of my decisions may be a bit easier. Unless there is a tax advantage family wide to taking more, I plan to withdraw as little as possible and let the rest continue to accumulate tax free.

So what do I think is so complicated?

What goal to set for the IRA money.

This really isn’t too complicated, just potentially subject to change depending on what happens during the rest of my life!

For now, the goal for the IRA money is to grow it and pass it along to the kids and grand-kids  with perhaps a small portion of it used to provide funding for special events and projects for myself and my spouse.

Later, however, if either of us requires long term care, it will be used to fund that for as long as needed or until the money runs out.

What is the best family wide tax strategy.

If I minimize my own tax burden, will it add to that of my heirs?  How can I find the best tax strategy for the family as a whole?

Do some Roth conversions now before higher tax bracket time?

We are in the lowest tax bracket now that we probably will ever be. I am over 59 ½ so it may make sense for me to convert a portion of the funds from the traditional IRA to the Roth IRA. That way, we pay a lower tax, don’t have to take distributions from the Roth and I can leave it to my Grandchildren who can withdraw tax free over their life expectancy. I know my accountant figures this out for his own Dad every year, and I think I would want the accountant’s help in figuring out how much to withdraw without putting us at risk for additional tax rates and penalties.

When should I start taking Social Security?

If I start taking social security when I am at full retirement age (as I now plan to do), when I start taking IRA distributions as well, it may bump us to a higher bracket. Should I hold off on Social Security until I’m 70 to execute some Roth conversions and stay in our lower bracket and get more money?  OR perhaps I should get the money fast in case I die young.  Perhaps I should take it and gift the kids with it to get it out of my estate so they don’t have to pay estate taxes on my death.

If my spouse dies before me, the annuity from his pension comes to me but in a reduced amount and I may need the Social Security or IRA withdrawals to help with my living expenses. If I die first, his pension amount will go up, which is good, since he is not eligible to benefit from my Social Security.

How to allocate the investments within the account.

Many people think that if you are over 60 you should keep your money in cash or bonds to be ‘safe’ from market downturns. But with the possibility of living another 20 or 30 years; and the (in my mind) very real possibility of increased inflation rates once the Fed removes quantitative easing, I disagree.

However, that said, I don’t want to risk having all of the money in products that fluctuate a lot. I don’t want to be forced to sell at a loss in order to get the money for the taxes on the distribution (I plan to use withdrawals to fund the extra taxes, even though we could pay them from taxable accounts if needed).

What I think I may need in the IRA account are multiple different asset classes (bonds, stocks of different types, mutual funds and even some REITS – as well as a bit of cash, perhaps enough to handle a year’s tax on that years distribution. That way, I could take the withdrawal partly in cash and partly as in-kind stock (so I am told). I currently have dividend paying stocks, quite a few international mutual fund shares, some bond funds and some cash in there).

Which investments should I actually use for the withdrawals?

This decision will probably need to be made each year as I prepare for that year’s minimum required distribution, depending on market conditions and the state of the companies in which I have invested. I’ll also need to decide if I want the entire year’s distribution at the start of the year or if I want to spread the withdrawals over the entire year.

Have you faced any of these decisions? What other things should I be considering for the situation described?