It might sound strange, but retirement planning doesn’t end when you retire! In fact, regular and consistent planning throughout retirement is the best way to reduce unpleasant surprises on your tax returns, and to keep your budget and retirement income in line. In particular, one unpleasant surprise that everyone should avoid is the possibility of a large tax penalty at age 70 ½.
At some point after you retire, you will begin taking distributions from your Thrift Savings Account. Many people choose to delay these distributions as long as possible, accessing other forms of income such as Social Security to pay the bills. A few of you might even keep working long past your full retirement age (as defined by Social Security). Delaying distributions is a terrific strategy, as it helps your retirement funds continue to grow. But if you wait too long, this plan could backfire in a big way.
Specifically, we’re talking about the rule within most retirement plan (including the Thrift Savings Plan) that requires you to begin minimum distributions by age 70 ½. The IRS established this rule because retirement plan contributions are made free of taxes during your working years, and at some point they want you to begin withdrawing taxable income from that account. If you don’t take your RMDs on time, you could face a stiff penalty on your taxes, in the amount of 50 percent of the distribution you should have taken. Ouch!
If you haven’t begun taking distributions already, you must do by April 1 following the year in which you turn 70 ½. However, there is one potential complication to this plan: Depending when your birthday falls, you might be required to take another distribution by December 31 of that year. For some people, this could mean that they are pushed into a higher tax bracket that year, and they will owe more money than usual to the IRS.
As with all things related to retirement, required minimum distributions can become a tricky issue. Your RMDs are calculated according to a specific formula, and the rules can be confusing for most people. It’s better to plan ahead for these distributions, than to scramble to fix mistakes later. So, schedule regular appointments with us throughout your retirement years, and we’ll discuss your strategy ahead of time. We can help you anticipate your income needs, and work to prevent any unpleasant surprises.
