Will IRA Withdrawals Fund Your Retirement?

For millions of Americans, the largest portion of their retirement savings sits inside traditional IRAs and 401(k) accounts. These tax-deferred accounts can be powerful tools for building wealth — but without a withdrawal strategy, they can also create significant tax consequences later in life.

In this episode of Retirement Roadmap, Evan and Mark discuss how IRA withdrawals work, why Required Minimum Distributions (RMDs) matter, and how taxes can impact the income you actually keep during retirement.

They also explore Roth conversions, tax diversification, Medicare premium considerations, and why many retirees may face higher taxes than they expected.

Whether you're already retired or still building your nest egg, understanding how and when to withdraw retirement savings could make a substantial difference in your long-term financial plan.

In This Episode

0:00 — Will IRA Withdrawals Fund Your Retirement?
0:45 — Why Traditional IRAs Can Become Tax Time Bombs
2:00 — How IRA Withdrawals Are Taxed
3:00 — The Myth of Being in a Lower Tax Bracket in Retirement
4:00 — Early Withdrawal Penalties Explained
5:00 — Why Timing Matters When Taking Retirement Income
6:00 — Required Minimum Distributions (RMDs)
7:15 — How IRA Withdrawals Can Affect Medicare Premiums
7:40 — The Farmer and the Seed Tax Story
9:20 — Roth Conversion Strategies
11:00 — Tax Diversification and Retirement Planning
12:30 — Why Younger Workers Should Consider Roth Contributions
14:30 — Getting a Retirement Roadmap
15:15 — Why Planning Early Matters
17:30 — Common Retirement Planning Mistakes

Visit masterplanretire.com to access our retirement checklists, podcasts, and schedule a complimentary consultation.
Call 770-980-9262 to speak directly with someone about your retirement planning needs.

https://masterplanretire.com/

Catch all episodes of our podcast at https://www.masterplanyourretirement.com/resources/episodes

Listen to Mark Fricks on Saturdays at 12:00 p.m. on XTRA 106.3 FM WFOM.
Sign up for one of our upcoming events at https://www.masterplanyourretirement.com/events

Purchase Mark’s book, The Road Less Traveled: Turning Your Retirement Worries Into an Excursion of a Lifetime, on Amazon: https://a.co/d/4fx94Al

Advisory services offered through MasterPlan Retirement Consultants, Inc., a Registered Investment Advisor in the state of Georgia. Insurance, tax and commodities services offered through Fricks and Associates, Inc. dba MasterPlan Retirement Consultants. The aforementioned are affiliated companies.

Transcript

Welcome And The Big Question

0:16

Will IRA withdrawals fund your retirement? Hey folks, welcome back. Thank you for joining us. This is Retirement Roadmap with Master Plan Retirement Consultants. My name is Evan. With me as always, retirement planner Mark Fricks. During this episode, we'll walk through the key rules and strategies around traditional IRA withdrawals and how timing your withdrawals could make a meaningful difference in your overall retirement picture. Mark, when we look at vast majority of Americans' retirement preparedness, most of their money is being built up in one or two large accounts, be it a 401 IRA, maybe a couple of IRAs, maybe a little Roth on the side or something. But we've go decades building these accounts with intention to use in retirement, but very few people have any sort of strategy or even understanding of how we're going to use that bucket of money in retirement for income, for growth, for whatever our needs would be.

The Hidden Tax Bomb In IRAs

1:18

Yeah, from a tax standpoint, not talking about how to take income necessarily today, but from a tax standpoint, it it can be an exploding tax time bomb in the future. It really can. And you know, whether you need your IRA or not in retirement, and we're talking about pre-tax traditional IRAs, um, even if you don't need it, you've got to take it out anyway at one point. So we'll talk today a good bit about some strategies to hopefully reduce that retirement tax burden in the future years. Absolutely. So starting at the very base, traditional IRAs, what are they? They're tax-advantaged retirement accounts that allow workers to take a deduction when they contribute money to them, and then upon withdrawal, they pay income taxes, and that's after 59 and a half for most people. But when and how you take those withdrawals, of course, can have a significant impact on what you actually keep. Yeah, because it's all subject to full federal taxation. So whatever tax bracket you're in at that point in your life, uh, then you're going to pay taxes on that money. Um and it could also drive up your state taxes, depending on what state you live in. It could affect some other areas we will talk about today as well. So it you know, we were kind of forced into a corner uh back in 1979 when ERISA laws were created, which created 401ks and 403Bs and all of these accounts we're talking about. And they are great at uh tax deduction. Uh they are great at accumulation over the years because your dollar cost averaging into them if you're working for an employer, if they're matching, the market makes money over time, and it's growing tax deferred, which is a very powerful feature as well, but they get you on the end, right? So uh and and back back when I first started in the business, um back in the uh early to mid-80s, um, the whole story was don't worry about it because you'll be in a lower tax bracket at retirement, which we have shown with our four to five hundred clients is not true. Uh almost all of them were in the same tax bracket. Sometimes they're in a higher tax bracket. So that and and it's going to be higher, we feel, very strongly that taxes will be higher in the future. Uh you can't have $39 trillion worth of debt, uh Social Security uh system that is leaking and and on the verge of failing or at least reducing uh Medicare. I mean, I could go on and on, but it it it's uh taxes will be driven higher in the future. So um some of the strategies we will talk about today is how do we maybe get some of that money out of there while while they're getting as good. Absolutely.

The 59 And A Half Rule

3:54

Well, you know, so withdrawals um taken before 59 and a half, so we know that 59 and a half is when we can start taking penalty-free withdrawals. But if you start taking withdrawals before 59 and a half, unless you have a couple of caveats, if you if depending on a medical emergency, uh first-time home buyers, things like that, but it's very specific. Don't just take it willy-nilly. Um that's the financial term, by the way, financial planning term, willy-nilly. Um put that as a caption at the bottom of a screen. Ross, our producer would you handle that for us? Thank you. There is a hyphen in that too as well. Willy-nilly. Uh link it to Urban Dictionary, please. Um Withdrawals taken before age 59 and a half are generally subject to that 10 percent early withdrawal penalty. And that's on top of your ordinary income taxes that result from each withdrawal. So for instance, if you're under 59 and a half, and let's just say you're in the 12 percent tax bracket, that could mean losing close to a quarter of the withdrawal amount between the taxes and the penalty. So be really careful about that. After 59 and a half, you've got a lot of considerations.

Why Random Withdrawals Can Backfire

5:04

Now, you know, back in the 90s uh when our market was uh averaging almost 18 percent, 17, 18 percent average annual return, you know, maybe create, I would say an income plan was still needed, but you could just pull out of your IRA or 401k whenever you just wanted the money. And I mean, with that kind of an average annual return, you've got a pretty good solid look at your retirement moving forward. However, now we know our average return is between six and seven. Over the last uh twenty eight twenty-five years, yeah. And the the greatest loss was fifty-five or something. That's not something we can just take withdrawals willy-nilly because you are at uh huge risk of digging in, locking in your losses, and you might never recover. And we we saw a lot of people go back to work after 2008. Um but waiting too long to withdraw can also create some problems. I mean, because traditional IRAs are 100 percent taxable when you withdraw, just like you said, it's taxes ordinary income. Um it adds to your taxable income for the year, so your reportable income is going to increase with every withdrawal. And we can see folks really getting getting into trouble creating this snowball and not realizing that they're doing it until April comes and they start reporting their taxes. Well, though, you know, the the thing, when you look at your IRA state money or 401k or whatever, you you want to see growth. You want to see it growing bigger and bigger, but you're creating a bigger and bigger tax situation for you, uh, your spouse, and your heirs uh that may inherit that as well, which we may we'll touch on uh later

RMDs And Medicare Premium Surprises

6:43

as well. But it's just it's just building up and up, and and whether you again, whether you need it or not, um at 73, between 73 and 75 ages, um you're required to start taking money out, again, whether you need it or not. Just so think about a million-dollar IRA. That first year, it's right around 4% you have to take out. Well, that's $40,000 added to whatever other income you have, Social Security, pensions, other other forms of income uh at that age. And so uh, and then we'll talk about this, I'm sure, too, is Irma, Part B Medicare premiums as well can go up significantly. So um again, it feels good building up, but let's get we've got to have a plan to get some of that money or all of that money, depending on how aggressive you want to be, out of that later to be taxed into that let's pay taxes on it now while taxes are cheaper, and then it'll come out tax-free later on.

Pay Tax On The Seed

7:40

Right. It's it's the old, if we've got time for the quick story, the old the old farmer in the field. Um uh farmer Brown out in the field farming, uh, and he's got the old plow hooked up to Bessie and all that kind of good stuff, right? Uh I hope you're picturing this, all right? Uh and so this big uh black uh sedan pulls up and a gentleman steps out in a nice uh uh dark suit. Uh it's not meant in black, it's uh the IRS. And he walks up to Farmer Brown and says, Um, um, we have a new friendlier IRS, and we have a um we have a um a plan for you that gives you an option of how you pay your taxes. And Farmer Brown goes, Well, I'm listening, go ahead. He says, Well, typically what you do is you you plant your seeds, uh, you water, uh, the sun shines down, uh, the plants grow, and then in the fall you harvest, and whatever you profit you make of that harvest, you pay taxes on. He said, Yes, sir, that's the way it works. He said, How about this year you go ahead and pay me m uh our tax on that bag of seed right there for a brown set? I kind of like that. So that's the same thing as a traditional IRA versus a Roth IRA. You can either pay the tax on the seed, in other words, when the money goes into the Roth, or you can treat it like an IRA, which means that uh that that crop of money is going to grow and grow over the years, and now you're gonna pay taxes as the harvest is produced. And I think that's a great illustration of the cr how critical it is. Let's get it out of the way now. Yeah, and and it's different for everybody, obviously. We've got some episodes in the past that are highly focused on income planning. Um today we're discussing more about specific withdrawals and you know the strategies around theirs. But the but of course they correlate because um they are often used in the same strategy.

Roth Conversions And Tax Diversification

9:26

Um but potentially spending down some of that IRA money in the early retirement years, maybe when you are not as reliant on withdrawals with RMDs, things like that, um spending down that tax-deferred money maybe while you're waiting for Social Security to grow, supplement so your Social Security can get bigger and bigger. Spend down some of that tax money while you're in a lower tax bracket because we know we're gonna be spending more late in our later years. We also know taxes are very likely gonna be increasing in the in the coming years. Um spending that down while you can, um, but also conversions. Right. Um you can convert to a Roth by paying taxes now on a specific amount within your IRA or 401k or tax-deferred money. You can convert by spending the money now, paying that tax bill, kind of like Mark said, a little bit different, but paying that seed money or go ahead and taking some of this part of the uh field or the the harvest. Well, while the tax on the seeds is less. Right, why right. While while they're just saplings and um, yeah, let's pay the taxes now and get it over into Roth, continue that uh the growth of that money so that in the future, when that account has gotten larger, we can take withdrawals completely tax-free. And and there's a window for doing that too. That's it's a little bit different for everybody, but then there's also some very specific times that are beneficial for everyone to consider converting. It's a little bit different for for everyone based on income, age, are you still working and not working, or you're expecting some major money coming in, like a bonus or something? Uh so all that has to be weighed. Also depends on your mentality when it comes to paying taxes now. It's difficult, you know, to say I've got to struck a check for, you know, $10,000 for taxes this year, more than I normally write, uh, and it's really bugging me. And and but, you know, we've got clients that's been with us 15 to 20 years, and now they're looking and saying, wow, I love the fact that most of my money's over here tax-free. Uh I'm not being forced to take money out. My kids that inherit this won't be paying taxes on my IRA uh for the next 10 years after I pass away. So it's it's it's you know, we're an instant gratification society, right? Yeah. Uh so we have to kind of get past that mentality and say, I want to pay the price. And and let's say let's be clear here, uh, very few clients do we endeavor to have 100% tax-free. I mean, I would love it. Sure. But it's very difficult with a lot of different moving pieces here. So we believe in what's called tax diversification. Let's have some money taxable, checking, savings, things of that nature, maybe a brokerage account you can dip into pretty easily. Let's have, we're probably going to still have some tax-deferred traditional type of money that's taxable. But let's let's make that bucket smaller and let the third bucket get bigger, which is that tax-free bucket that's coming out, like a Roth, like a specially designed life policy. Um and so those buckets need to be more even. Right now, most of that money's in that middle bucket. That traditional, it's going to hurt when you start taking it out bucket. Yeah, and look, the best time to start building up that tax-free money is as soon as possible. And if you uh as a listener have younger kids, maybe they're early in their career, um, they they don't really know which direction to go. I mean, it's it's hard for us to give blanket blanket recommendations. Of course, we don't know you, so um uh but this one we can make. But this is one we can make. Put money into that Roth. Tell your kids to start putting money into their Roth. If they're if their uh employer has a 401k, tell or 403B or whatever, tell them go talk to HR, go talk to your plan representative, whoever, find out if you have a Roth option, and then start putting money into that. That's the best time to start. Give yourself all those years rather than putting away into tax deferral, which is still traditional IRAs, tax deferral is still a good thing, but we can do a little bit better in the long run if we're putting away money for 30 years and all of a sudden the money we take out is tax free. You're no longer beholden to the IRS, you're no longer beholden to the tax law changes, unless of course someone swoops in and changes the Roth rules. But I I I I think any existing Roth and any money in an existing Roth, no matter what happens, will be grandfathered. I don't see how they can come back in and say, okay, we're gonna force you to put that back into a traditional and pay us taxes on it. Uh I will say this very few people that come to our office realize that they have a Roth option at work. Um I I had somebody the other day, I asked them about it. They they had digg through the 401k manual and found it like on page 28 in like one paragraph or something like that. And it's not and you don't see it when you log in, you have to actually go in probably and maybe even call the custodian, you know, whether it be in power, fidelity, whoever, and say, I want to add a Roth option, and they can maybe give you some guidance on that as well. So it's not just as easy as clicking a button. But again, if you're a younger, uh younger person, um start strictly all Roth and you will be really, really happy in 30 years. You know what is as easy as clicking a button?

A Simple Next Step For Planning

14:32

What's that? Going to masterplanretire.com, clicking the schedule now button. Um it's a one you're one click away from scheduling your complimentary consultation, folks. That's an opportunity to discuss your own retirement, your hopes, your dreams, your fears. We'll run a series of reports for you. We'll stress test them to give you an idea of where you are because you gotta know where you are to get to where you want to be. That's completely complimentary. Go to masterplanretire.com and schedule today. Yeah, would you like to know if you're on the right road to retirement? Would you like to have a roadmap to retirement? That's kind of where that begins is running those reports. Uh so masterplanretire.com is a great place to start. You'll actually have a conversation with Evan R. I and uh we will move on from there, and it's all complimentary. So I was actually uh at the radio station yesterday um talking to our representative there, um, and we just got casually on that conversation. We were talking about estate planning, and you know, he was dealing with stuff with his parents um and and their estate and making sure everything's in order, and thankfully things were. But what we got on to the but it was a a long process to make sure. Um we were getting along that conversation about how most folks in estate and legacy planning, they don't it takes going through a bad situation before you start to prepare for yourself. It takes experiencing uh the bad side of it to realize I've got to handle this. And that's we see that in so many things in life, especially estate planning, but especially in retirement planning. You know, if there's so many people that come to us and we create retirement plans for uh that that we create a great retirement for them and help them along that process, but I don't know anyone who said, Oh, I wish I had waited before I came to you guys. Everyone says, if I had started sooner, if I had if I had known better, if I'd done this. One of the things that keeps us from doing that is the fear of the unknown. We don't want to know what's waiting for us because what if it's not enough? What if we can't retire? What if you know it doesn't look as good as I'm hoping, or I feel like you know, embarrassed because I haven't been diligent enough, or whatever. Um, the first step is finding out because you can't pro progress, you can't move forward until you know where you are. You don't know what you have to do to get to where you want to be. It's exactly like visiting a doctor. Many people put it off, they're afraid what they're going to find. Um but it it's um you're exactly right. I mean, so many people that come in, they're like, oh yeah, I need a will, I guess whatever. But if they say I want to do something with my estate planning, it's because they were an executor or the executrix over uh a probate that just or their air their parents or whoever didn't have an estate plan and then they were stuck in probate for a year or so, you know. Yeah, it can be a huge mess, and and uh a lot of our listeners and viewers know that because they've experienced it as well. So I would just implore you um take it take advantage of those complimentary consultations. Um there's no strings attached, but it will give you a foundation and a vantage point for yourself to decide, okay, what direction do I need to go in? And let me say something else about that too. So uh so many people come in have already made mistakes. And sometimes they're irreversible. But but financially speaking, had somebody come in the the other day, they bought a couple of uh insurance products that were not very good insurance products, and there was th there's no way to get them out of it quickly. It's got it's got charges to get out, and they they might have needed a tool similar, these were not good tools, but there was no plan around it. You know, it's like saying, I'm gonna build a house. I don't have a blueprint, but I like that window. So I'm gonna go buy ten of those windows and maybe they'll fit in somewhere. Uh all of a sudden you get a mess. You know, so we come in and I asked them why why did y'all purchase these? Uh the guy just told us we should buy them. Yeah. There's no plan, there's no purpose, uh, and now they're, you know, semi-stuck. But what if you you turned on Social Security and then at 62 and you realize at 66 or 66? Do you want to go back to work or whatever? Or you you should have waited because it had been 70% bigger payment or whatever. Um have a plan. Yeah, it was like, well, I've got a window. I don't have any sheetrock. I guess I can use this for my bathroom wall, but it's gonna be uncomfortable for everybody. Or the door. Anyways, um, before with that image

The 55 To 65 Conversion Window

18:53

in mind. Uh so we talked about, yes, of course, start as early as you can. But for those who are closer to retirement, there is a window for conversion that is typically good for most people. 55 to 65 is often cited as a good time to consider converting some funds from your traditional IRA uh to a Roth. You know, at this point, children may be out of the house, income may be lower, there could be flexibility to cover the taxes on the conversion, but also um a couple years before 65, you don't have to worry about Irma, which is the taxation of your Medicare, Part B, which i d is influenced by your income. More income you have, the bigger your payment. Uh the standard payment, I think this year's 202. Um, but every every next level of income you hit, it goes up. It can be as much as $700 a month per person. Yeah. Um and so conversions count toward that. So I do have some clients that that are, hey, I'm willing to go to level two. Yeah. And I'm willing to pay $300 if it means getting more money out of my IRA. But I don't want to hit, you know, $400 a month or whatever it may be. And plus you have to consider the federal tax as well, what it what what taxes are we paying. Uh, and a lot of that planning we do uh at the end of the year, last quarter, uh, so we'll know where your income is for that year. Maybe you think it's going to be here, but then you get a bonus. Or maybe you had to take some money out of an IRA to pay for the roof. Yeah. And so we want a better idea of the income as well. So we're very strategic when it comes to conversions and and because we want to save money now, but also save money later. Yeah, and there are other ways, you know, it's hard to do any of these things as just, oh, I need to do this conversion, or I need to nothing exists in a bubble, it exists within a plan. All of this works together strategically. Just like Mark said, if you do too many things in one year, you you're you might put yourself in a terrible tax bracket, and that could have snowballing effects with Irma or whatever. Um but all of these strategies are individually on their own good, but they don't exist in a vacuum. They have to work together in an income plan. Income and growth starts first in retirement planning for most people. Where's your money coming from? How are we taking it the most efficient way? How are we growing money as well so that we have money down the road? Now let's look at the taxation of that. How can we chip away at some of that future tax burden that we have through tax-deferred growth when we take those withdrawals? How can we start chipping away? Do we need to convert in the early years? Do we need to um how do we prepare for those RMDs that are down the road?

QCDs And Keeping Taxes Low

21:25

QCDs are an incredible option for folks too. We've discussed those before, qualified charitable distributions basically at 70 and a half, so a few years before RMDs for most people, at 70 and a half, you can take withdrawals from your IRA and send them directly to a 501c3 nonprofit, be it a church, be it an animal shelter, be it whatever, and that is completely tax-free for you and the organization. So something that we love to share is for uh for instance, if you are uh attend church regularly and you tithe and give regularly, rather than taking that tithe from your income, let's say your Social Security or whatever that comes in that's already taxed after tax money, rather than taking that from your monthly budget and giving, why wouldn't you just take it from your IRA, set it up monthly contribu d contribution, qualified charitable distribution from your IRA to the 501c3? You're not taxed on it, they're not taxed on it, you're chipping away a little bit of that future tax burden, and you're you've got more in your pocket. If you're gonna give anyway, and you know, what maybe once a year the Humane Society or whatever it is you do, um I mean I it it it's almost silly not to do that. Yeah, it really is, because it's again, um I had a client recently and and they were trying to wrap their minds around it, and and so I had to really walk through the benefits of it. Finally it dawned on them, yes, I've been paying, you know, to these charities with money I've already paid taxes on. Why don't I just go directly from the IRA? And and and it's um, you know, whether you're giving now or not, um, you know, many people give to charities, right? And I think you can do up to $100,000 a year from your IRA or or whatever, uh to charities like that. So could uh again wheeling down that IRA, less RMDs when those start as well. So it's just uh I think a really a no-brainer. We could talk circles around this topic. I mean, even Social Security, the taxation of your Social Security is dependent on the amount of income you bring in. Um, if if that's all income from an IRA, that's all fully taxable, that's all adding your to your tax bracket. But the more of that income that can come from a tax-free vehicle like a Roth, that's dropping down your adjusted gross income for the year. Um with the proper strategy put in place, with the proper work and and dedication, you could have a very, very low tax burden in retirement and still have the income that you need to live your golden years the way that you want to and have that lifestyle. You can actually have a zero under today's laws, a zero tax in retirement if you truly are aggressive now. We've got a few clients doing that as well. And I want to mention RMDs one more time. I mentioned it's almost four percent in that first year. That four percent increases every year. The next year is like four and a half percent, the next year is like five point two percent. So by the time you reach age eighty,

Final RMD Reminder And Wrap

24:16

who knows? But we are out of time and it's been a great episode. Thanks for joining us, and until we see each other again, land well and prosper. Take care.