The Golden Decade

The Golden Girls, golden years, and now the golden decade? What gives with all of the gold talk? I’ll admit to having watched many an episode of the hit show featuring four ladies living out their best days as gray-haired singles. Even as a young guy, it was easy to see the appeal of such action-packed lives, regardless of their age. Who wouldn’t want to hang out with Rose Nylund, played by Betty White?

This week, I want to have a discussion about the ‘golden decade.’ In retirement planning-speak, the golden decade is the decade between ages 59-1/2 and 70-1/2. Yes, that’s slightly more than a decade, but I’ll ask for your grace in this instance. This decade begins with your ability to withdraw money from qualified accounts like 401(k) and Traditional IRAs without an IRS 10% early withdrawal penalty at 59-1/2. At the other end, the age of 70-1/2 marks the moment when you MUST withdraw money from these accounts, in the form of Required Minimum Distributions (RMDs). What happens in-between these ages is up to you, but it’s an opportunity to engage in a number of financial moves that can and will have a significant impact on your retirement success.

While there are many other notable financial milestones during the golden decade, including eligibility for Social Security Income and Medicare – both decisions will have a profound impact on your finances – I want to focus our discussion on the Required Minimum Distributions you must take from your 401(k) and IRA accounts. At 70-1/2, the IRS requires that you withdraw approximately 3.9% of these qualified accounts, whether you want to or not, and you must continue to take RMDs each year, until death or all of your accounts have been withdrawn. The percentage you must withdraw grows each year. Why RMDs? After all of those decades of deferring taxes in these accounts, the IRS decides it’s time you finally pay up. The problem is if you don’t need that money for retirement income, the RMDs can add a significant amount of taxable income to you.

How much tax? Well, let’s see:

A person with a $500,000 IRA will have to withdraw roughly $18,450 at age 70-1/2. That adds $18,450 of income on top of other income sources, such as pension and Social Security. If this person is now at a 15% Federal tax rate, that’s $2,768 of new taxes owed. While that may or may not sound like a lot of money, keep in mind that this process continues year after year, until death. Where I come from, that amount of money compounded over years and years becomes real money.

So what can you do?  

If you’re fortunate enough to not need the money in your 401(k) and IRA accounts for retirement income, you may want to take advantage of the golden decade to reduce the impact of the taxes triggered by RMDs. This means you may want to consider withdrawing smaller amounts of money from qualified accounts each year, long before turning age 70-1/2 in order to keep the RMDs lower and also to spread the taxes due over more years. This may avoid a large ‘lump’ of income all at once. Similarly, someone with earned income during this golden decade may choose to do a sequence of ROTH IRA conversions, allowing the once tax deferred money to become tax free for the remainder of life, after paying tax on the converted amount.

Yes, this can become somewhat complicated, but the gist is this: if you’re fortunate enough to have saved enough that you don’t need most or any of your qualified money for income, developing a withdrawal or conversion strategy long before age 70-1/2 may have a substantial impact on your overall wealth. This can lead to greater bequests to children, grandchildren, church and charity, without negatively impacting your lifestyle.

While the golden decade may lead to your golden years, don’t miss an opportunity to engage in proactive planning while you still can. Reply to this email if you’d like to learn more about how you might reduce unnecessary taxes and increase the value of your hard-earned life savings. To not do so, you may be missing out on a golden opportunity.

All the best,

Adam Cufr, RICP®