Living in Retirement
Turning on the Retirement Income
When it comes time to withdrawing your retirement savings, you must be very careful to review all of the tax aspects for each of your various investment vehicles. Some investments may be available income tax-free, others fully taxable or could cost you a 10% IRS early withdrawal penalty if taken out prior to age 59 ½. Do you have a pension plan at work that will pay you a definite stream of income for as long as you live? Typically available to government and military employees, these are referred to as a “defined benefit plans”. These plans are quickly being replaced by 401(k) or 403(b) plans that simply provide you access to a pot of money that you had to contribute to and manage. However, when you leave your employer, most retirees will want to take control of these retirement assets and remove them from their former employers.
In retirement, you should be able to design an income stream that you will never outlive. You can choose whether to withdraw your savings as a lump sum or from several different payout options, including life certain or for a guaranteed specified time period. You should not have paid any taxes on your interest earnings in your employer’s retirement plan or in your own IRA or tax-deferred annuity until you choose to receive the income, which is usually at retirement, when you may be in a lower income tax bracket. Remember, to anticipate that you will probably now have to pay income taxes on your retirement income as you receive it.
Please keep in mind that there is no additional tax-deferral benefit for annuities purchased in an IRA or any other tax-qualified plan, since these are already afforded tax-deferred status. They still may be appropriate because many annuities come with substantial unique guarantees.