When is a million in your 401k or IRA not a million?

When you start withdrawing money from your 401k or IRA.  Then you must pay taxes on that money.

You saved your whole life. You took advantage of your employer’s 401k plan.  You did everything right.

What happens now that you are retiring?

Know the Rules

First and foremost, understand the rules the IRS wants you to follow when withdrawing money from your IRA.  Fail to do that, and you will needlessly throw away money paying penalties:  the IRS charges a 50% “excise tax” on the amount you failed to withdraw.

See the IRS webpage for “Required Minimum Distributions” – RMDs.  

https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-required-minimum-distributions-rmds

On that webpage the IRS states that you must begin withdrawals “when you reach age 72 (73 if you reach age 72 after Dec. 31, 2022).”

Avoid Taking Money from Your 401k or IRA Before That

If you can, live off your Social Security income and your regular, after-tax savings or investment account until you reach your RMD age.  

In addition to your 401k / IRA account(s), you should have built up an after-tax savings or investment account of $125,000.  If you retired at 65-67, that should be enough to see you through until you reach the age where the IRS’s RMD applies.

IRS Rules for RMDs

The IRS rules are available online.  Review the IRS rules yourself; confirm what you learn with your Financial Advisor.  It is a good idea to then review what you understand by visiting the local IRS office, and confirm the rules with them.  Avoid any penalties!  

Another Gotcha

As noted, the IRS states that you must begin withdrawals for your first year by April 1st of the following year.  However, the RMD for that second year must be taken by December 31st of that year.  

If you wait to make your initial withdrawal after December 31st, you will be making two withdrawals in the second year – i.e., almost double the level of income for one year.  Doubling your income is certain to put you into a higher tax bracket, increasing the amount of income tax you will pay for no good reason.  

In other words, do not wait until the following January-April time period allowed for the first RMD.  Make that first RMD by December 31st.

There are other complications as well.  Review the EMD webpage until you understand it, and talk with someone from the financial institution(s) where your 401k and IRA accounts are held.

Your Goal Is to Afford More

Your goal is to minimize the amount of tax you must pay when you withdraw money from your 401k or IRA.  

Make the amount you actually receive from that million in your 401k or IRA as close as possible to a million. 

● ● ●