While retirement may seem a long way away, the tax-deferred status of individual retirement accounts can help make that time work to your advantage. Once you reach retirement age, some of the restrictions on your withdrawals vanish, and your IRA funds become more accessible. How you use those funds is ultimately your own decision.
Withdraw Your Entire Account
Any time after you reach age 59-1/2, you can take money out of your IRA without paying the early distribution penalty of 10 percent. If you'd like, you can take out all the money in your IRA and spend it as you please. For most IRAs, you'll still have to pay income tax on any withdrawals, even after retirement. The exception is a Roth IRA, from which you can take money tax-free. One of the dangers of taking out all of your IRA money at once is that you may bump yourself into a higher tax bracket. This would cause you to pay more tax on your withdrawal than if you spaced it out over time.
Take Regular Withdrawals
Whether you want to or not, at some point in your retirement you'll be forced to take money out of your IRA, unless it's a Roth IRA. Upon reaching age 70-1/2, the Internal Revenue Service requires annual withdrawals known as required minimum distributions. Because the minimum required amount varies based on your life expectancy, you'll have to take out a greater percentage of your account value as you age. The penalty for noncompliance is 50 percent of the amount of your required distribution.
Except for your required withdrawals, you don't have to take money out of your IRA. You can continue to invest the money in your account as you've been doing your entire life. As you age, your investment profile likely will change. Older investors do not have the time to recover from a significant market decline, so you'll probably shift your investments to more secure choices like bonds or certificates of deposit. However, the power remains yours. There is no law forcing you to withdraw any more than the minimum required amount from your IRA after you retire.
Keep Contributing to Your Roth
Since there are no mandatory distributions for Roth IRAs, you can keep contributing to them for as long as you'd like. If you already have enough in other savings to fund your retirement lifestyle, this can make having a Roth IRA a major advantage. Rather than being forced to deplete your retirement account, with a Roth you can continue to grow it, either for your heirs or for your own use in the future.
- IRS: Publication 590 -- Are Distributions Taxable?
- IRS: Publication 590 -- Early Distributions
- IRS: Publication 590 -- When Must You Withdraw Assets? (Required Minimum Distributions)
- IRS: Publication 590 -- Roth IRAs -- Must You Withdraw or Use Assets?
- IRS: Publication 590 -- Roth IRAs -- Can You Contribute to a Roth IRA?
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