Somewhere between a withdrawal that’s too large and one that’s too small is one that’s just right.
Before you start taking withdrawals from your tax-deferred accounts, you need a plan for how much to take and when to take it, to be sure that you are:
- Providing enough income to meet your financial needs
- Continuing to take advantage of tax-deferred growth
- Withdrawing the required minimum after you turn 70½
Different paths to cash
If you’ve accumulated a substantial IRA with regular contributions or have transferred other retirement plan payouts into a rollover IRA, you’ll want to consider the big picture before planning your withdrawals. One issue is deciding which accounts to draw on first. Another is selecting the way the money moves from the IRA into your hands — or your checking account.
If you have just one IRA, the issue is choosing which investments to sell if you must liquidate assets to have enough cash to withdraw. Generally the least attractive alternative is having to lock in a loss.
If you’ve set up a number of IRAs to allow you to make different types of investments, to keep rollover IRAs separate from IRAs holding earned income contributions, or to name different people as beneficiaries, the choice may be complicated by conflicting goals.
You’ll have to decide what’s most important to you. It may be holding onto growth investments for as long as possible. It may be keeping the account values of IRAs with different beneficiaries as parallel as you can. Some goals may be mutually exclusive in any given year.
The actual withdrawal may be taken as a lump sum at any point during the year, at any time you need money, or by setting up a systematic withdrawal program with your IRA custodian. In that case, you receive a regular monthly payment that’s usually a fixed percentage of your account value and ensures you’ll withdraw at least the required minimum and perhaps some principal.
Three ways to withdraw
Once you calculate the amount you must withdraw for the year, you can take it at any time by liquidating assets in your traditional IRAs and moving the money to your regular checking or savings account.
For example, if your equity investments increase dramatically in value in a stock market rally, you might decide to sell enough shares to equal the amount you must take for the year. While there’s no way to time the market so that you always sell at the very top, the only way you can be forced to sell at the bottom is if you wait until the last few days of the year and prices drop.
On the other hand, one advantage of waiting until the end of the year is that you can pick up an additional 12 months of tax-deferred earnings. If your investment returns are strong during the year, your account value can get a big boost.
As you need it?
You can take income as you need it. If you’ve got other regular sources of income, you can withdraw from your IRA when you need extra cash — to pay quarterly bills such as insurance or estimated taxes, for example, to make gifts, take trips, or meet extraordinary medical expenses.
The potential drawbacks of this approach can be either not taking enough to satisfy the required distribution or dipping too far into your principal too soon, which could put your future financial security at risk.
You can set up a regular schedule. If your retirement savings income is an essential part of your living expenses, you may find it easier to manage your cash flow by taking a regular amount on a regular schedule, as if you were earning a salary. One appeal of systematic withdrawals is that you don’t risk forgetting to withdraw, or have to liquidate your assets in a rush to meet the minimum withdrawal for the year.
You can work with your financial professional to set up a long-term liquidation plan or to decide which assets to liquidate at a particular time.
If you’re selling off equity assets each month to provide income, you may have to sell more shares in some months and fewer in others — a kind of dollar cost averaging in reverse. For example, if your stock mutual fund’s net asset value (NAV) is $25, you’d have to sell 100 shares to produce $2,500 in income. If the NAV rises to $30, you’d have to sell just 831 ⁄3 shares, and if it drops to $20, you’d have to sell 125 shares.
Time to reallocate?
If your investment portfolio is essential to your retirement security, it’s more important than ever to seek the highest potential return at an acceptable level of risk. An analytical tool called a Monte Carlo simulation projects the outcomes of various asset allocations by accounting for multiple combinations of factors that affect investment performance, such as interest rates or inflation. The goal is to identify those allocations with the strongest likelihood of providing the return you need.
Monte Carlo modeling isn’t something that you can do on your own. But working with a qualified financial professional or enrolling with a highly regarded online provider of portfolio analysis may be a cost that pays for itself.
The 3 Ways To Withdraw Money From Your IRA by Inna Rosputnia
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