Retirement is something we all plan for in terms of opening up retirement annuities. Most people start saving when they get their first job, with companies offering the traditional 401(k). Many continue with that plan, without ever really rethinking whether it is the best option for them.
But those who are putting work into shaping their retirements will have had to deal with all sorts of restrictions. There are various plans that take relatively small maximum contributions and don’t forget the required minimum distributions (RMDs).
RMDs prevent you from leaving your retirement fund untouched after a certain age. Recently, that age has been raised to 72 years. Once you turn 72, you need to take out a minimum amount every year. That figure starts at about 3.65% and gradually goes up as you get older.
However, not everyone wants to take RMDs and some would rather keep their retirement fund whole as long as possible. This may be because they wish to leave it all to their children or for other reasons.
The good news is that there are ways to shape your retirement yourself regardless of RMDs. Here are 5 strategies to use.
1. Set up a Roth IRA
This option is for those who are still relatively far from retirement age. While the traditional 401(k) is the most popular option for working Americans, there are actually many alternatives available. You may have to negotiate with your HR department if you are to switch from a 401(k) to another plan.
One such plan is the Roth IRA, which is popular among self-employed people and business owners. The Roth IRA gives you more control over your retirement savings and there are no RMDs. You can still take distributions when you hit retirement age but are not required to.
2. Invest Your RMDS in Long-Term Funds
If you have stuck with a traditional 401(k) and have to take RMDs, you can choose to invest them in interest-bearing accounts. By putting them in long-term investment accounts, you guarantee a fixed interest rate for years to come. However, only take this option if you are certain you will not need the RMDs in your retirement. This is a great way of saving for your family’s future, but if you need to take out your funds early, you will pay penalties.
3. Pay Tax Now Rather Than Later
One of the reasons people wish to avoid taking out their RMDs as long as possible is that they know they will be taxed on the amount. Retirement annuities work on the basis that untaxed savings will be taxed when withdrawn. There are certainly benefits to this, but not everyone wants to delay paying taxes on their retirement funds.
You can choose a different kind of retirement annuity if you want to make contributions after taxes. The Roth IRA and Roth 410(k) are two examples. If you take this approach, you can withdraw your retirement funds without worrying about tax after you have stopped working.
4. Find a Retirement Planner
One option that younger people should consider is working with a retirement planner. This is not because retirement is going to creep up on you, but because the earlier you plan your retirement, the more opportunity you have to influence it. It is very difficult to envision your own life decades from now, but retirement planners have a lot more insight into the process.
Find a good retirement planner who can help you decide on what retirement plan to choose, and this way your RMDs will work to your benefit no matter what.
5. Get a Universal Life Insurance Policy
One way of avoiding taxes on those RMDs if you do not need the money for yourself is to get a universal life insurance policy with the funds. By directing your RMDs to a universal life policy, you transfer them into a tax-free account that your loved ones will benefit from when you die.
Retirement planning is confusing and most people do not want to think about it until it is already too late. By starting your planning early, you can shape your retirement yourself rather than letting others do so for you.