Six ways to maximize retirement "sweet spot" years
By Lynn Brenner
NEW YORK (Reuters) - During your working years, it is usual to focus more on gaining an immediate deduction for retirement account contributions than on how future withdrawals will be taxed. Financial advisers say that as a result, affluent people often retire with a portfolio of huge tax-deferred IRAs and 401(k) accounts -- and belatedly realize they must tap the accounts for substantially more than living expenses to cover annual taxes on their withdrawals.
But there is a "sweet spot" -- between the ages of 59½ and 70½ -- when withdrawals from tax-deferred accounts are penalty-free, but not yet required. Advisers say those 11 years are the ideal time to protect yourself by moving some money into taxable and tax-free accounts instead of continuing to plow it into tax-deferred accounts.
"Most of the time, people are in the same tax bracket in retirement as when they were working, because of money coming out of IRAs and 401(k)s," says Ronald W. Roge, chairman and chief executive of R. W. Roge & Co., a Bohemia NY financial planning firm. "I tell clients, 'If you have a $1 million IRA, after federal, state and local taxes, you own about $600,000.'"
Most advisers say tax rates are likely to rise in the future. "In a down market, those big taxable distributions can kill you," says Eleanor Blayney, a Mclean, Virginia adviser.
With a tax-diversified portfolio, you can plan cost-effective withdrawals, says Barry C. Picker, a Brooklyn New York tax accountant and IRA expert. He lays out an example of how helpful it is to have more than one type of account to draw on:
You retire at 65 with a $1 million IRA and a $500,000 taxable account. Assuming 3 percent annual growth, the accounts will throw off $45,000 of income a year - $30,000 from the IRA and $15,000 from the taxable account. But what if you withdraw the entire $45,000 from the taxable account? You've taken $30,000 of principal, so you're only taxed on $15,000 of income.
Now you're in a lower bracket, so your Social Security may be only partially taxable. And it may now cost less to transfer money from your IRA into a Roth IRA. That makes your IRA smaller, which may reduce your future required annual distributions.
How can you achieve that kind of flexibility? Continued...