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The Importance of Taxes and RMDs on Your Retirement Accounts
by Gary Foreman
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You've been saving for 50 years or so. But you hear that RMDs and taxes could take a big chunk out of those savings.
We wanted to find out how required minimum distributions and taxes affect your retirement accounts, so we contacted Brian Puckett. Mr. Puckett is a CPA, Certified Financial Planner®, and attorney. He's responsible for Align Wealth Management located in Oklahoma City and Tampa Bay. He's also written on ways to reduce taxes in retirement.
Q: Most of us want to believe that our taxes will go down after we retire, but that's not necessarily true. Why is that?
Mr. Puckett: When you think about it, if one pays less tax, then one must have less taxable income. Folks who have worked hard in their careers, spent less than they made, and invested wisely tend to end up with more money than they need. Many of these folks also end up with an income that is equal to or greater than what they earned while working. Hence, they tend to have great lifestyles and they tend to end up in a tax bracket that matches that lifestyle.
I might add that, in all my years in the financial planning business, I've never had a prospective client ask me to show them how to lower their income. It's human nature to strive for better, not worse.
Q: Is there a "one size fits all" solution to minimizing taxes on IRAs and 401k distributions?
Mr. Puckett: Not really. Every case is different because every person is different. That said, it's usually wise to spend taxable or tax free assets before tax sheltered assets.
Q: What's an "RMD" and why is it important that I know about it and plan for it?
Mr. Puckett: RMD, as the term is used with respect to retirement accounts, stands for Required Minimum Distribution. It's important to know the rules and how to best apply them to minimize your overall tax burden. Failure to timely take a RMD can result in a penalty of 50% of the amount one should have withdrawn.
Q: You advise clients to prioritize which retirement accounts they use for withdrawals. Why is that?
Mr. Puckett: Because it can help them save taxes but most importantly because it can improve the odds that they won't run out of money before they run out of life.
Q: Can I set up a withdrawal plan when I retire and then just put it on autopilot?
Mr. Puckett: You can, but that's dangerous. Things are always changing like taxes, interest rates, inflation, etc.
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Q: So I should review it periodically?
Mr. Puckett: Definitely.
Q: How often should the reviews be?
Mr. Puckett: If one is a do-it-yourselfer, then I'd recommend a monthly review. If one has employed a quality financial advisor, then one to three meetings annually should suffice, unless there are extraordinary circumstances.
Brian Puckett is a CFP®, CPA/PFS and Attorney at Law, making him one of the very few "Triple Board Certified" financial advisors in practice today. Business Week listed Brian among the Top 50 most experienced independent financial advisors in the United States. He also has served as adjunct professor at the University of Central Oklahoma and lectures at a variety of institutions and continuing education programs for financial planners, CPAs, and attorneys. Brian holds a bachelor's in business degree (with high honors) from the University of Oklahoma. Brian enjoys spending time with his son, Jay, and a number of sporting activities, including bicycling, paddle boarding, and golf.
Gary Foreman is a former financial planner and purchasing manager who founded The Dollar Stretcher.com website and newsletters in 1996. He's been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money and CreditCards.com. Gary shares his philosophy of money here. You can follow Gary on Twitter or visit Gary Foreman on Google+. Gary is also available for audio, video or print interviews. For more info see his media page.
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