Rethinking Your Retirement Funding Options
Margaret Amsden
As a result of the drastic fluctuations in the market over the past six months, many taxpayers have seen a decline in the value of their retirement portfolios, so now may not be the best time to draw from your retirement savings, even if you are eligible. Fortunately, the CARES Act, passed at the end of March, provides some relief through temporary changes that eliminate certain withdrawal requirements and relax some of the loan rules.
To navigate difficult financial planning decisions pertaining to Social Security (SS) and Individual Retirement Account (IRA) Distributions, consider the guidance below.
Social Security
You can choose to claim Social Security at a few different ages and each age has different issues to consider.
- Age 62 –This is early and will result in a reduced benefit along with limits on your ability to claim and continue working. As a result, if you are still working, this may not be the best option for you.
- Full Retirement Age (FRA) – This varies between age 65 and 67 depending on when you were born, and is the earliest you can claim full Social Security and continue working without affecting your benefit.
- Age 70 – If you defer until this age, your benefits will grow from the time you reach FRA until you reach age 70. They do not grow any more after this point.
If you or your spouse made the decision to defer claiming your SS benefits until you reach FRA or possibly till you reach age 70, you may be living off your retirement assets. Due to the recent stock market changes, now may be the time to reassess that strategy.
Individual Retirement Account
There are a myriad of rules that apply to IRAs, many of which are driven by the age of the taxpayer.
- Age 59 ½ – The earliest that you can draw on your IRA without penalty, unless you meet certain specific exceptions.
- Age 70 ½ – The required age to begin Required Minimum Distributions (RMD) if you turned 70 ½ during 2019.
- Age 72 – The required age to begin RMD if you turned 70 ½ during 2020.
Once you reach the minimum age of 59 ½ you can draw as much as you want; however, once you reach the age RMDs begin, there is a minimum amount you must take or you are subject to penalty. The Required Minimum Distributions (RMD) is always computed based on the Fair Market Value (FMV) of the account at the end of the prior year. So, for example, the RMD for 2020 is based on the value at 12/31/19, which may have been significantly higher due to the declines in the market experienced in early 2020. With that in mind, the CARES Act suspended the distribution requirement for the current year which will allow you to significantly defer income into the future and avoid taking large draws when your portfolio has been diminished due to market activity.
Take these considerations into account when reviewing your Social Security and IRA Distribution plans. Our team is ready to help you reassess your retirement strategy and make smart financial decisions. For additional information, call us at 248-208-8860 or click here to contact us. We look forward to speaking with you soon.