Income Strategies

How much income in retirement do you need? For an overview of establishing safe and consistent income, refer to the “Perpetual Income” page under Investments on this website. In summary, you can take between 4.0% - 4.5% of your total investment portfolio and then adjust it for inflation each successive year.

Most people are familiar with the requirement that if you own an IRA, you are required to commence a RMD (required minimum distribution) by April 15th in year after you turn 70.5 years old. If you do not, or forget, there is a 50% penalty plus the regular income tax. The RMD is very easy to calculate by taking the total IRA balance at 12/31 of the prior year and dividing it by the factor next to your age in the Uniform Lifetime Table which is a link on this Website. You can take the RMD in one distribution or over as many distributions as you want. If you do not need the income you can roll it over to any brokerage account or even a Roth account if you want. It is not recommended to defer your RMD until age 71, because then you will be required to take a double distribution in one year.

Given all the volatility in the stock market over the last decade, one school of thought is to withdraw out of your investment funds the amount of cash that you will need over 2 – 3 yrs. Set this amount aside in a safe bank account or money market account. That way you know that the funds you will need are there and you do not have to worry about the volatility in the market. With the remainder of your nest egg available to be fully invested in the market, you do not have to worry about the ups and downs in the market just when you think you will need some cash.

In an ideal situation, you would want to go into retirement with a balanced portfolio in a Roth IRA, brokerage account and municipal bonds so that you would not have to worry about income taxes and the timing of the withdrawals. Remember Uncle Sam is you biggest financial partner and stands behind nobody when it comes to your liability. So to take the federal government out of the picture is one of the smartest financial moves you can make. It makes sense to convert to a Roth IRA with the following conditions:

  • Low income tax rate
  • Have a large tax loss from a business
  • Will not need the funds for a long time
  • Expect significantly higher income tax rate in the future
  • The younger you are
  • Can pay income taxes with funds not from IRA being converted

When considering conversion of a large IRA into a Roth, set up multiple IRAs with different investment strategies. Go on extension until October 15th following the tax year. Only convert the Roth IRAs that have had a significant gain. Recharacterize the other Roths back to IRAs and you will not have to pay any income taxes. You can reconvert back to a Roth if you wait at least 3o days or wait to the following year.

If you have any questions about these income options, please contact us at Quest Financial Services Inc. for a complementary consultation to see which strategy works best for your situation.