This retirement planning guide in real people language tells you how to transition your income from a paycheck to a withdrawal strategy for retirement paychecks; when you can withdraw from retirement accounts without penalties and things you need to know about taxes on those withdrawals.
Be sure to consult your own tax or financial advisor about your specific situation.
You can begin taking withdrawals from an IRA account beginning at age 59 1/2. After that age, there are no withdrawal penalties.
You will pay normal income taxes on the withdrawal, either withheld at the time of distribution or you can pay at tax filing time.
It is possible to setup withdrawals before age 59 1/2 without penalties, but there are very specific rules for how much you can withdraw.
For advice on this you should consult a tax professional.
To avoid the 10% tax penalty on a 401k withdrawal, you must be 59 1/2 UNLESS you separate from service (quit your job) in the year you reach age 55 or later.
In other words, if you decide to retire at age 55 or later, you can access your 401k funds with that employer without penalty.
When you reach age 59 1/2 you can then roll over to an IRA to have more investment choices and to have more control on your tax withholding. This will allow you to leave more of your money invested, for longer.
Withdrawals from a 401k are subject to a mandatory tax withholding of 20%. If your tax liability at income tax filing time is less than this, you will be entitled to a refund.
You can instruct your IRA servicer to withhold the percentage you want or nothing, so you won't need to wait until tax time to get taxes back. This lets you leave more invested for a longer time.
Since you can access a 401k at age 55 (if you quit the job where you have the 401k account), but you cannot access an IRA until age 59 1/2, there are 4.5 years that you may need to keep your money in the 401k rather than rolling it over to an IRA if you plan to stop working between age 55 and 59 1/2.
If your tax bracket is low, you will get some of this money back at tax filing time. This can reduce the amount of the next year’s withdrawals by that amount, or you could earmark the refund for a special purpose, such as a vacation or home repair.
You will only be required to pay income taxes on the portion of your IRA that was contributed pre-tax or that was interest earned on the investments.
After tax contributions are not taxable because they were already taxed, but any interest earned on these contributions is taxable.
After tax contributions are any contributions you made that did not reduce your taxable income at the time you made them. For example, you made too much money to be eligible for tax reductions.
In some states annuities are protected from creditors.
Fixed annuities provide a guaranteed return on the money invested, although it is usually lower than other types of investments. The advantage is that you don't have to manage the investments. You get a guaranteed income for the term of the annuity. This can be for life, or for a specified number of years.
For your money that is not held in retirement accounts, you can keep it in:
Mutual funds through a brokerage service, such as your bank or an online brokerage, which allows you to continue growing your savings through equities (stocks), bonds, mutual funds, etc. (My personal preference is mutual funds because I've never had good luck picking individual stocks.)
"High performing" savings accounts these days offer rates that are comparable to some CD's with fewer restrictions.
Treasury bills, notes, and bonds are available from the federal goverment at treasurydirect.gov
Real estate can provide attractive returns as residential rentals, commercial properties, or real estate investment funds. There can be risks or gaps in income when the property is vacant, or when repairs are needed. Good planning can minimize these risks and still provide good returns.
One more topic you should learn about: investment ladders.
Laddering investments is a way of separating your money into "stages" of conservativeness depending on how soon you will need to use it.
For example, each year you will move money out of your most aggressive investments into a tier of investments that are gradually more conservative with the tiers representing how soon you will use it. A 1 year CD, 2 year CD, 3 year CD, would be one way of doing this.
Each year you will re-fund the 5 year pool. Some years these pools will earn better or worse rates of returns than others.
**Information in this retirement planning guide is summarized from research from sources including the IRS website and websites of tax professionals.
These statements should be verified by your own tax and/or financial advisor in case of errors, misinterpretations, or differences in state laws.