by Nancy Osborne, COO of ERATE®
July 12, 2007 - Now that the hard part is over and you've actually saved enough to realize your dream of retirement, how should you set up your accounts to begin transferring your money back to yourself? In most cases you want to draw on your retirement accounts as follows: taxable accounts then tax-deferred accounts and lastly any Roth IRA accounts. You will want to deplete taxable accounts first with the exception being if you have a looming capital gains exposure. It is best to transfer the funds that are required to cover your monthly living expenses into a money market account. Rather than reinvesting interest, dividends and any capital gains that your retirement assets have produced, these funds should be directed into a money market account where the money may be transferred directly into your personal checking account as needed. Expenses for a period up to three months should be included in the money market account as this will provide sufficient cash to also cover the taxes due on the interest and dividends being tapped into. After all your living expenses have been covered, recycle any remaining surplus in the account to re-balance your total portfolio.
If you find yourself in the fortunate position of watching your assets continue to grow in retirement, and you do not anticipate out-living your retirement funds, you may want to explore some estate planning options. Rules and laws in trust and estate planning may allow you to transfer assets to your heirs at the time of your death without paying estate or gift taxes. However if the interest, dividends and capital gains generated by your retirement assets are not sufficient to cover your living expenses then you will likely need to sell some of your retirement assets to help pay your expenses. The difficult trade-off here is that when retirement assets are liquidated those assets are no longer available to generate income for you, so as you reduce your principal you will in turn reduce your income as well. This is where planning is essential so you can maintain control by evaluating your portfolio and determining what will work best to help maximize your funds in your individual situation. When you are in a position where you need to sell off retirement assets you may want to consider the following guidelines: first sell those assets which will help re-balance your portfolio so you continue to meet your overall asset allocation objectives, next sell off assets which will result in the smallest taxable gain.
As recommended previously, taxable accounts should be drawn on first, after the required minimum distribution (RMD)* is met. For those over the age of 70.5, their RMD* should be set aside in a money market account. All distributions of interest, dividends and capital gains should be paid out as distributions to help re-fund the money market account which should in turn be used to fund your living expenses. Thereafter tax-deferred accounts can be used after the taxable accounts have been spent down with any Roth IRAs to be drawn on last. Remain vigilant in re-balancing your portfolio and its asset allocation annually. This will help manage your portfolio's risk as well as maintain its potential for growth.Express Mortgage
*RMD=Required Minimum Distribution
The internal revenue service (IRS) requires that you withdraw this minimum amount from your retirement account on an annual basis beginning the year you turn age 70.5. For more information visit:
Always consult with your tax or financial advisor regarding your own individual circumstances.
Nancy Osborne has had experience in the mortgage business for over 20 years and is a founder of both ERATE, where she is currently the COO and Progressive Capital Funding, where she served as President. She has held real estate licenses in several states and has received both the national Certified Mortgage Consultant and Certified Residential Mortgage Specialist designations. Ms. Osborne is also a primary contributing writer and content developer for ERATE.
"I am addicted to Bloomberg TV" says Nancy.