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How to Make Money on Your Tax Payments in Retirement?

| January 30, 2018
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It's a new year, and if you're over 70, you might be looking at your required minimum distribution from your retirement account and wondering when you should take it. As I see it, there are two camps of people:

1)     If you need the money, taking it via an automatic monthly distribution is a convenient way, much like your paycheck used to be. Having taxes taken out automatically is also nice, so you can avoid having to remember to mail in quarterly tax payments. 

2)     In the other camp are people that don't need the money, and have other income or savings that they're living on. 

For those in group 1, it’s quite easy. We will work together to set up your distributions like a paycheck, and then we can make adjustments as needed.

For those of you in group 2, I still recommend getting tax withholding amounts from your CPA and setting up federal and state tax payments that automatically go to the government. Often these withholding amounts exceed 30% or 40% of the required distribution amount. Since this is such a large sum, I believe that in many cases, it makes sense to delay taking the distribution until the end of the year, perhaps around December 1st. 

For example, if your required distribution is $50,000 per year, and 40% or $20,000, is going directly to the government in the form of taxes, over time, in theory, you could be able to earn some money on that $20,000.

This wouldn't hold true all of the time of course, if the market drops substantially you might have wished you made the payment earlier in the year! And, in some cases, when people are nervous we see them make the payments early as a hedging mechanism. 

However, over the long term, with the market going up roughly 70% to 80% of the time, this could be an incremental edge to your investment returns. 

Planning around retirement distribution decisions can be complex, especially when retiring or required minimum distributions start impacting you. In addition to input from your CPA, we are happy to brainstorm some options with you and help in any way we can.

Thanks for taking a look!


This article represents opinions of the authors and not those of their firm and are subject to change from time to time, and do not constitute a recommendation to purchase and sale any security nor to engage in any particular investment or legal strategy. The information contained here has been obtained from sources believed to be reliable but cannot be guaranteed for accuracy.

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