4 Ways to Maximize Your Retirement Plan After Age 70
Estimated reading time: 4 minutes
Turning age 70 ½ is a significant age when it comes to having a retirement plan. Many are faced with a tax liability they were not expecting due to Required Minimum Distributions (RMDs). Taxable distributions may also affect other benefits during retirement such as Social Security. Others may also want to continue making contributions as part of their post retirement strategy. Some are also just wondering what they should do to prepare their beneficiaries upon their death. In this article, we'll discuss four important aspects of retirement planning after 70:
Required Minimum Distributions (RMDs)
Congress says once an individual reaches the age of 70 ½, the requirement for retirement plan participants is to start taking RMDs from their retirement plan accounts. The plans included are your employer plans such as profit sharing, 401(k), 403(b) and governmental 457(b). Individual retirement accounts include your Traditional IRA, SEP IRA and SIMPLE IRA. Roth IRAs are not subject to RMDs while the Roth IRA holder is alive. Failures to distribute the RMDs from employer plans have grave tax consequences to the employer including penalties and potential plan disqualification.
IRA holders will be subject to a 50% penalty for any amount failed to be distributed. Certain types of investments that are hard to liquidate may be an issue when it comes to taking the RMD. Although taking an in-kind or distribution of property may be an option of satisfying the minimum, it may be difficult and sometimes costly because of the costs involved in valuing the investment as part of the distribution process.
One option is paying the 50% penalty, which many people have not thought about. By paying the 50% penalty using the IRS Form 5329 and completing Section 9, the RMD does not have to be distributed for the year. Keep in mind that distributions are subject to tax. The tax owed may not quite be 50% but close to that, putting into consideration the federal and state tax on the distribution. Not taking the distribution also keeps the investment in-tact. Other possibilities to avoid RMDs are to convert assets from their Traditional, SEP and SIMPLE IRAs to a Roth IRA. Roth IRAs are not subject to RMDs for the Roth IRA holder. With the tax cuts as part of the Tax Cuts and Jobs Act of 2018, a strategy could be created with a tax advisor on incrementally converting assets to a Roth IRA.
Social Security income is typically not taxed as long as the combined taxable income of an individual or a married couple is below a certain level. IRS publication 915 provides more information on how your social security benefit is taxed. As an example, for a single filer in 2017, if the combined income is between $25,000 and $34,000, up to 50% of the social security benefit could be taxed. For married couples if the combined income is between $34,000 and $44,000 up to 50% of the social security income could be taxed. For combined incomes of above $44,000, up to 85% of the social security income could be taxed. Taxable retirement plan distributions are included in determining the combined income of a tax payer. Roth distributions that are “qualified” meaning tax-free, will not affect social security benefits.
Contributions at age 70 ½
While contributions upon attainment of age 70 ½ is prohibited in Traditional IRAs, other types of contributions can still be made. If an individual continues to work or owns a business, employer plan contributions can still be made regardless of age (i.e., SEP, SIMPLE IRA contributions, 401(k)). Roth contributions can also be made as long as the individual receives earned income for the year and falls below the income limits to contribute to a Roth IRA. People are living longer therefore are contributing to retirement plans as part of their post retirement strategy.
It is common to hear from certain clients “ I really don’t need this money”. They are saving their retirement plans to pass it on to the next generation. It is good to prepare the named beneficiaries on their accounts on the steps to take upon the inevitable event of death. Beneficiaries have options built into the tax law on how they could maintain the tax-deferred status of an account they inherit and possibly create a stream of income for their lifetime.
70 ½ is an important age when it comes to having a retirement plan. Many are faced with a tax liability they were not expecting due to Required Minimum Distributions (RMDs). Taxable distributions may also affect other benefits during retirement such as Social Security. Others may also want to continue making contributions as part of their post retirement strategy. Some are also just wondering what they should do to prepare their beneficiaries upon their death.
There are many ways to operate your self-directed IRA plan after age 70 with benefits or by taking precautions, depending on what you do as an investor. In summary, it's important to stay on top of RMDs, taxes, contributions and designating a beneficiary. For more resources, visit our Learning Center today.