Pre-Tax Retirement Plan Withdrawal Options
You’ve worked hard to reach your retirement goal. But do you have a plan for when it’s time to start using those savings? Should you take money out over time or all at once? If you’ve been contributing to a pre-tax retirement plan such as a 401(k), 403(b) or 457(b), or Individual Retirement Account to save, your withdrawal options will vary depending on what’s allowed in your specific plan. Let’s go over some of those options that may be permitted by these plans.
Systemic Withdrawals
Systemic withdrawals are consistent distributions of money to retirees during their retirement years. They are set up on a schedule, usually monthly or annually. The amount you may get depend on your age, life expectancy, and how much is in your retirement account. For example, if you choose periodic withdrawals on an annuity basis, you will receive equal payments on a schedule over your life or the life of your spouse or beneficiary. Or you could choose period payments on an installment basis, where you will receive equal payments for a pre-determined number of years or until the account is depleted. By choosing periodic payments, you can count on a steady income to support you during retirement for a period or until your death or the death of your spouse or beneficiary. Overall, periodic payments give you a structured way to access your retirement savings and stay financially stable longer.
Periodic Withdrawals
Periodic withdrawals are like systemic withdrawals but allow you more flexibility on how often and how much you withdraw. Periodic withdrawals allow you to plan to take out money from your account regularly, such as every month or every few months, or even on an ad hoc basis. This helps you have more control over the money you've saved, or deal with irregular income, while still benefiting from the tax-deferred growth of your retirement plan. With periodic withdrawals, you can plan better and help ensure you have enough to cover your retirement expenses without depleting your savings too quickly. Periodic withdrawals can be changed or terminated at any time.
One-Time Withdrawals
One-time withdrawals, also called lump-sum withdrawals, are when you take out a non-reoccurring amount of money from your retirement account. They can allow retirees to access more cash for emergency expenses or major purchases. One-time withdrawals can also be used to roll-over a certain amount from one retirement plan to another that has either preferable investments, fees or withdrawal options. Before making a one-time withdrawal, it's a good idea to talk to a financial advisor who can help you understand the tax and financial consequences and explore other options that might work better for your retirement plans.
Required Minimum Distributions (RMDs)
RMDs are mandatory withdrawals, that apply to non-Roth Contributions or traditional IRAs, the Internal Revenue Code (IRC) requires you take once you turn 73. The IRC will require you to withdraw a minimum amount from your retirement accounts yearly. This amount is determined by dividing the retirement account’s prior year-end fair market value by a life expectancy factor published by the Internal Revenue Service. If you don't take your RMDs, you could get hit with hefty federal penalties and additional taxes. Make sure you understand and follow the RMD requirements to avoid any issues and make the most out of your retirement plans.
Which Option is Right for You
Since retirement means living on a fixed income, maintaining financial stability during your retirement is an important part of your plan. Understanding your options to create a tax-efficient withdrawal strategy will allow you to keep more retirement funds. Take the time to consider which method is right for you and create a personalized plan that will allow you to enjoy your golden years to the fullest.
This blog is up to date as of October 2024 and has not been updated for changes in the law, administration or current events.
