Roth IRAs — on which you pay no income taxes on withdrawals — are exempt from the required minimum distribution rule, so you may want to hold on to these as long as possible. You can always leave them to your heirs, who will also never pay income taxes on them.
Each year, your RMD depends on how much money you had in your retirement account at the end of the previous year, and the IRS' projection of your lifespan.
For example, the IRS's Uniform Lifetime Table gives an unmarried 75-year-old a life expectancy factor of 22.9. If this person had $100,000 in a retirement account at the end of the year, he or she would be required to withdraw $4,367 by the end of the following year.
You can also use AARP's required minimum distribution calculator to help figure out your upcoming RMD.
You must calculate your RMD separately for each account you own, However, for IRAs and 403(b) accounts, you can spread the total required distributions across any or all of those accounts. For 401(k)s and certain other accounts, though, the required distributions have to be taken separately from each of those accounts.
While the RMD represents the amount that you must take out each year, you're free to take larger distributions. But, to make sure your savings last as long as you do, experts suggest taking no more than 4 percent of your account balance the first year, and giving yourself a 3 percent "raise" each year. The rest of your expenses should be paid for by a combination of sources, including Social Security, insurance annuities, other investments and any public benefits available.
The bank that holds your retirement accounts will also want to know how you would like to receive these distributions — annually, quarterly or monthly. There's a key tradeoff there: If you take monthly distributions, the rest of the money in your account can continue growing in value. If your portfolio has taken a hit along with the rest of the economy, you may want to withdraw money as slowly as possible to give them time to recover, rather than selling off investments at a loss.
But if you take an annual distribution (or even a large one-time lump-sum distribution), it may be easier to reinvest that money into another vehicle, like an annuity that will provide a guaranteed monthly payment for a chosen period of time.
As you're making these decisions, you may find that your sources of income aren't enough to support your current lifestyle. This is nothing to be ashamed of. Due to a stagnant economy and the rapid disappearance of corporate pensions, many Americans won't be able to maintain their standard of living in retirement.
There are other ways to bridge the gap, though, including cutting back on expenses, finding ways to turn your skills into income and — only as a last resort — tapping home equity through a reverse mortgage or other tool.
Whether we like it or not, hiding under the sheets won't work when it comes to making this decision about when and how to draw down your retirement savings: If you fail to take the minimum withdrawal each year, you'll pay a 50 percent tax on the amount you were required to withdraw.
So get out of your PJs and face the sunshine.
Jean C. Setzfand is vice president of financial security at AARP.
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