Contributing to your 401(k) is easy. But when you withdraw this money, that’s when things get complicated. And if you don’t have a plan, it can cost you thousands of dollars in taxes, fees, and penalties. The key is to plan well in advance of ever needing this money. If you hate paying taxes now, just wait until you start withdrawing money from your retirement plans. When you turn 70 1/2, required minimum distributions kick in, and you can be forced to sell your investments and withdraw money from your retirement accounts whether you want to or not. And you’ll never get this money back again. This leads us to sequence of returns risk, the risk of retiring in a bear market. You will have to withdraw because of required minimum distribution‘s or simply to have money to live on. But if the market is down you could be in big trouble. Withdrawing money when your accounts are in the red can and this will have grave consequences. The returns during your first 5 to 10 years of retirement are critical to your success. Retiring in a bear market could destroy your savings and investments and those who just happened to get lucky and retire in a bull market fair significantly better than those that don’t. Even if short term volatility averages out into strong long-term returns, retirees could still be in hot water if the sequence of those returns are bad at the very beginning of retirement. It is also important that you develop tax diversification. You do not want to have too many assets that are taxed the same way or at the same time. This accentuates the significance for having proper tax diversification. In my experience, it’s one of the most underrated financial planning concepts. We must build into your withdrawal strategy tax diversification such that you have three baskets of money. The three baskets of money are the taxed always basket, the taxed later basket, and the taxed rarely, if ever, basket, Also One of the best ways to take control of your taxes in retirement is by figuring out the right timing and the right amount of money to convert into a Roth IRA because that will allow you to withdraw money and pay zero taxes when you do. It’s a financial game changer for you and your family. Another benefit of a Roth is that there are no early withdrawal penalties to worry about. If you withdraw from a Roth account before 59 1/2, you only pay taxes on your earnings. We build this into your dynamic withdrawal strategy. I can only build for free a dynamic withdrawal strategy for my first 25 listeners of this podcast. To receive it and schedule a meeting so that we can customize this for you, and the meeting can be virtual, call me at 770-622-9145. You can also email me, [email protected].
