Expert Contributor | By Terald Shaw, Financial Advisor, CLTC®, BFA™, Thrivent
Preparing for retirement involves more than growing your savings. How you choose to spend your savings can also affect the amount of money you have available. The taxes you pay on tax-deferred accounts, such as an individual retirement account (IRA), may change over time. Use this timeline to learn how the current—and future—tax environment may impact your retirement income.
Understanding the five phases of an individual retirement account (IRA)—and other tax-deferred accounts—can help you anticipate potential tax consequences and help bring your retirement dreams to life.
1. Accumulation: Up to age 59½
Tax deferral is a big incentive to save as much as you can. Keep in mind that income taxes are due when you start using money from a tax-deferred account. At age 59½, investors can begin withdrawing funds from their IRA without an early withdrawal penalty. Income tax diversification helps you be more tax-efficient with your assets and may increase your available income.
2. Tax control: Age 59½ through age 73 or 75
During this time, you might decide to quit working and retire. This may involve tapping into your retirement funds and considering the optimal time to start claiming Social Security benefits, typically between ages 62 and 70. Moreover, turning 65 marks eligibility for Medicare coverage. This stage offers ample opportunity to fine-tune your financial strategy and pursue your retirement aspirations.
3. Required minimum distributions begin: Age 73 or 75
This phase begins at age 73 or 75 with what you might call the “government plan” for your IRAs. Once you reach age 73 or 75, you must begin taking withdrawals from qualified retirement accounts in the form of required minimum distributions (RMDs). The good news is there’s likely still time to manage the impact of these dollars. Married couples typically file their taxes with “married, filing jointly” status during these years.
4. Required minimum distributions continue: Single filer
When one spouse from a married couple dies, from a tax standpoint, the surviving spouse becomes a single filer after years—or decades—of joint filing. The resulting “widow’s penalty” could affect your taxes when a single person earning less income still ends up owing more in taxes, because tax brackets may favor married couples in some cases. (The penalty can also impact Medicare premiums and how your Social Security benefits are taxed.)
5. Pass IRA to beneficiaries
The SECURE Act that became law in 2020 could change the way you transfer wealth with a retirement account. Retirees who have leftover income from their IRA and leave it to their children can no longer stretch account distributions over their life expectancy. Your beneficiaries have just 10 years to use those dollars and pay taxes on the money.
Take action
Let’s explore options to help reduce your tax burden. Together, we can help ensure your financial strategy is ready for all five phases of an IRA.
Thrivent financial advisors and professionals have general knowledge of the Social Security tenets. For complete details on your situation, contact the Social Security Administration. Thrivent and its financial advisors and professionals do not provide legal, accounting or tax advice. Consult your attorney or tax professional. Thrivent is the marketing name for Thrivent Financial for Lutherans. Insurance products issued by Thrivent. Not available in all states. Licensed agent/producer of Thrivent. Thrivent.com/disclosures. Concepts presented are intended for educational purposes. This information should not be considered investment advice or a recommendation of any particular security, strategy or product. 27764-13A
Terald Shaw, CLTC®, BFA™ | Financial Advisor | 407-305-2591 | terald.shaw@thrivent.com | connect.thrivent.com/terald-shaw
