I retired at 60 and haven’t touched my $700K IRA thanks to my pension, Social Security — but what about RMDs?
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Alice recently retired after spending 30 years teaching English Literature at a world-renowned university. She’s made responsible choices with her money and has paid off her house while building a nest egg worth $700,000.
Much of this money is in a traditional IRA. She also receives a pension of $5,000 a month and Social Security payments of $2,000 per month, after taxes. The combined checks comfortably cover all of her current living expenses, sitting at just about $6,000 per month.
After retiring last year, Alice dug around for information about long-term care costs and learned about Required Minimum Distributions (RMDs). While Alice hasn’t worked with a financial advisor before, she is open to the idea as she wades into the world of long-term care planning, RMDs and tax efficiencies.
Here’s what she could do next.
While your golden years can be full of memorable times, the reality of aging is that it can also come with increased living expenses. At some point, you may no longer be able to take care of certain tasks on your own.
Some retirees simply need an extra hand with groceries or household chores. Others may require long-term care with daily support for everyday tasks. And while it’s easy to imagine staying healthy and independent forever, things don’t always play out that way.
Alice is a relatively young retiree and likely has many independent years ahead of her. But it’s helpful to consider that at some point, she may need to outsource some daily living tasks. In fact, more than half of Americans turning 65 will need some type of long-term care, according to the U.S. Department of Health and Human Services. (1)
Unfortunately, the price tag for long-term care is steep. Without coverage, you could be looking at $4,000 to $15,000 (or more) every month.
One way to mitigate against the potential costs of long-term care is to purchase long-term care insurance. For a single female, the average annual premium is $1,900, according to the National Council on Aging. (2) If possible, Alice should find a way to pay for this insurance product. Since she’s spending less than her income each month, it’s an expense worth considering to safeguard her financial future.
When considering long-term care insurance, GoldenCare offers different options based on your needs. These include hybrid life or annuity insurance with long-term care benefits, short-term care, extended care, home health care, assisted living and traditional long-term care insurance, too.
With GoldenCare, Alice could even combine her term life insurance policy with a long-term care insurance policy to give her and her family peace of mind.
Read more: 30% of US drivers switched car insurance in the last five years. Here’s how much they saved — and how you can cut your own bills ASAP
Beyond planning for potentially needing long-term care, Alice should also consider a plan for RMDs in her retirement. Since much of Alice’s nest egg is saved in a traditional IRA, the funds will be subject to RMDs once she reaches age 73.
Think of RMDs as the minimum amount an account holder must withdraw after a set age. Starting at 73, you’ll need to withdraw a set amount each year from accounts such as traditional IRAs, SEP IRAs, SIMPLE IRAs and employer retirement plans, according to the IRS. They’re the IRS’s way of making sure you don’t let your retirement money sit forever. And if you skip your RMD, you will be hit with a 25% tax penalty on the set amount.
There are many considerations needed when crafting the appropriate strategy for reducing RMDs. An optimal process involves understanding multiple tax rules and seemingly unrelated consequences, such as the impact of RMDs on Medicare eligibility. That’s why it’s usually best to enlist the help of a financial advisor.
An advisor may suggest to Alice that if she wants to minimize her RMDs, the best way is by lowering the balance of the relevant account. For example, she could pursue a conversion strategy that would pull funds out of her traditional IRA and put them into a Roth IRA, which isn’t subject to RMDs.
She would still have to pay income taxes on funds she withdraws from her traditional IRA before she tucks them into a Roth IRA.
Or, an advisor may simply tell Alice that she should opt for the simpler path. While she could further optimize her situation through RMDs, the hassle of properly timing conversions and managing the tax consequences may not be worth it for her.
Finding a financial advisor that suits your specific needs and financial goals is simple with Vanguard.
Vanguard’s hybrid advisory system combines advice from professional advisers and automated portfolio management to make sure your investments are working to achieve your financial goals.
With a minimum portfolio size of $50,000, this service is best for clients who already have a nest egg built and would like to try to grow their wealth with a variety of different investments. All you have to do is set up a consultation with a Vanguard advisor, and they will help you set a tailored plan and stick to it.
Another option, although one that needs long-term planning, is to capitalize on the backdoor Roth IRA method. If you have a high net worth like Alice, this might be something you want to start thinking about for your retirement.
After all, Roth IRAs don’t allow joint filers making above $246,000 or individuals making more than $165,000 in modified adjusted gross income to make contributions. But there’s no rule stopping you from contributing to a traditional IRA and then converting it into a Roth IRA.
If that sounds complicated — and it is — the experts at Range are here to help. They provide all-in-one white-glove wealth management services for high-earning professionals making at least $250,000 and households making over $300,000.
This includes navigating the complexities of the backdoor Roth IRA tax strategy and even the mega-backdoor Roth IRA method. But Range advisors can also offer proactive advice across your entire financial life, including alternative assets management — not just taxes.
And the best part? Unlike many white-glove investment services, Range offers a transparent, flat annual fee — no hidden costs or percentage-of-assets surprises — to help scale your wealth.
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Office of the Assitant Secretary for Planning and Evaluation (1); National Council on Aging (2);IRS (2)
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
