Thinking About Withdrawing Money from Retirement Funds? Don’t Make These Mistakes!
At the outset, retiring seems like ending your earning days and enjoying a life of all relief and no alarm clocks. But underneath, this long-term financial planning requires tricky balance of your spending while not exhausting your future savings. However, when it comes time to withdraw from your lifetime savings, even a single mistake can ruin your successful savings making you a little bit penny-pinching and dependent.
Here are some common mistakes that employees do while withdrawing money from their retirement saving accounts:
#Keep Waiting for Right Time to Withdraw from IRAs and 401(k)s:
IRS requires distributions from traditional IRAs and 401(k)s at the age of 70, but the retirement savers consider it as the minimum age to withdraw money from their IRAs and 401(k)s. Therefore, they keep waiting to tap into these tax-favored accounts. Moreover, by the time they turn 70, enough money is summed up in their IRAs and 401(k)s and required minimum distributions push them into higher tax brackets.
What to do: Take smart financial decision and start withdrawing money from your retirement accounts as early as by the age of 59 or so without any penalty. Designating the right strategy towards retirement planning can give you maximum returns while lowering down your lifetime tax liabilities.
#No Plans Matching with Spending Needs:
Generally, employees have little-to-no control over their spending needs. Thus, it is very important to select plans that address their needs. Spending plan not reflecting financial needs can lead them towards bundle of troubles- like poor tax planning, more out-of-pocket expenses, etc. In addition, whenever they need money they have to tap into retirement funds disrupting their future planning.
What to do: Make a budget outlining your expected expenses and have a plan ready in advance to cover contingencies. For example- have a “rainy day fund” that help you cover unexpected future expenses like some downturn or any other short-term financial crunch without tapping into your retirement savings.
#Lack of Information on Tax-Efficient Retirement Distribution Strategy:
Every retirement account is taxed differently and if you do not strategize your retirement withdrawals, you could pay more in taxes than you need to. Actually, retirement withdrawal decision highly depends upon individual’s tax situation. Therefore rule of thumb is- taking money first from least expensive assets i.e. the assets that are not earning much in terms of interest. Taking money from tax-favored accounts helps you minimize your future taxes while tapping earlier into Roth accounts helps you avoid any nasty aftermath on high taxable income.
What to do: Talk to your tax advisor or consult to a financial planner. Look at each penny of your money, figure out your tax bracket and determine the most efficient way to withdraw your retirement funds in order to enjoy your golden years with joy and peace of mind.
Rounding it off:
Failure to plan is planning to fail and the key to success is getting your retirement planning done right for the first time because there is no another shot once you knock into the retirement. Above article describes some actionable tips employees can adopt to avoid any risk at their retirement withdrawals and navigate a smooth retirement.