Say your last full paycheck comes in June and your pension starts in September. You’ll still have groceries to buy and family to visit in July and August. How much of that will need to come from savings?
Before you take money out, give the accounts you’ve built up over the years a fresh look. These six questions cover who’s named on them, how much you might need and what a withdrawal could mean for you.
Who is listed as the beneficiary on your accounts?
Think about the 401(k) from a job you left years ago. If you’ve remarried or lost someone since you filled out the beneficiary form, check whether the name on file still reflects your wishes. Some workplace plans require your spouse’s consent if you name someone else.
What to do. Start with the account you’ve had the longest. Ask the provider who’s listed and what the plan requires if you want to make a change.
If you’d like to look at the rest of your estate plan while you’re reviewing your accounts, start with our Readiness Check.
A useful place to start
How up to date is your estate plan?
The Estate Planning Readiness Check can help you consider what is already in place and identify one or two areas that may be worth reviewing.
Take the Estate Planning Readiness CheckGeneral educational information only. Not legal, tax, investment or financial advice.
What might an ordinary month in retirement cost?
Your commute might cost less once you retire. The annual insurance bill may still land in the same month. A rough estimate is enough to start, as long as it includes the bills you don’t pay every month.
What to do. Review three recent months of spending. Mark what you’ll keep paying, what might drop off and what you’d like to add. Check last year’s statements for any big bills those three months miss.
What money will come in, and when?
Knowing when each payment starts helps you see which months your savings may need to cover. If you’re counting on money from a workplace plan, check how it can pay out. Some plans offer a single payment, regular payments or other options.
What to do. Make a one-page list. For each income source, write down who pays it, how much you expect and when the first payment could arrive. For savings and investment accounts, jot down the provider and current balance.
How much will be left after taxes?
Say you’re using retirement savings to pay for a new roof. Will the money you take out still cover the bill after taxes?
The IRS generally counts the portion of a withdrawal you haven’t paid tax on as income. Money you already paid tax on can generally be taken out without paying federal income tax on that same money again. Roth withdrawals that meet IRS requirements are also free of federal income tax.
California residents generally report the taxable portion of withdrawals from IRAs and payments from pensions and annuities on their state return. The taxable amount can differ from what’s on your federal return. California does not tax Social Security benefits, though some of your benefit may be taxable on your federal return.
What to do. Bring your account list, the amount you’re thinking of taking out and your latest federal and California returns to a tax professional. Ask how much you’d have left to spend after taxes.
When will you have to start taking money out?
Federal rules require you to take a minimum amount out of certain retirement accounts each year once you reach a certain age. These withdrawals are called required minimum distributions, or RMDs. The age is 73 if you were born from 1951 through 1958 and 75 if you were born in 1960 or later. If you were born in 1959 or earlier than 1951, check your start date with your provider or tax professional.
Traditional IRAs generally follow the age rule even if you’re still working. Some workplace plans let you wait until you retire, but that exception generally does not apply if you own more than 5% of the business that sponsors the plan.
Roth IRAs and Roth accounts in a 401(k) or 403(b) generally have no required withdrawals during the original owner’s lifetime. Inherited accounts have separate rules.
Your first required withdrawal is generally due by April 1 of the year after your first RMD year. After the first RMD year, the annual minimum is due by December 31. If you wait until the following year to take your first one, you’ll have two deadlines that year.
What to do. Ask each account provider whether you’ll need to take required withdrawals, when the first one is due and who will calculate the amount.
How do Social Security and Medicare fit with withdrawals?
You can usually start your Social Security retirement benefit as early as 62. Starting before your full retirement age lowers the monthly payment. Full retirement age depends on your birth year. If you wait beyond that age, your monthly benefit increases up to age 70.
A taxable withdrawal can affect how much of your Social Security benefit is taxed federally. It can also affect what you pay for Medicare Part B and Part D prescription drug coverage. The extra amount some people pay based on income is called the income-related monthly adjustment amount, or IRMAA. Social Security usually uses federal tax information from two years earlier to work it out.
If you’re paying that extra amount and your income has dropped after a qualifying change, such as stopping work or cutting your hours, you can ask Social Security to review it using Form SSA-44. The form explains what income information and proof to provide.
What to do. Pull up your Social Security estimate and any Medicare premium notice you have. If you’re planning a large withdrawal, ask a tax professional how it might affect your taxes and Medicare premiums.
Put your first month on paper
The first month you’ll live on less pay or without a paycheck is a useful place to start. If you’ve already retired, use next month. On one page, write down what’s due, what money you expect and when it should arrive. If you get stuck on a detail, like when your pension starts, you’ll know what to ask about first.
Retirement got you thinking about what’s already in place for your family?
