The oldest members of Gen X are hitting a major retirement milestone: As of this week, they begin turning 59 1/2 years old, giving them the ability to withdraw funds from 401(k)s and IRAs theirs without paying the 10% early withdrawal penalty. . But financial advisers warn that it is usually better to wait than to use the savings immediately.
The average life expectancy for Americans is about 73 years for men and 79 for women, and financial advisors often model life expectancies for their clients much longer than that. Regardless, that’s at least 15 years of expenses to consider. Using 59½ accounts, even if no penalty is imposed, can significantly reduce total savings and destroy compounding returns.
Just because you can tap your retirement accounts without penalty doesn’t mean you should, financial advisers say.
“Almost all of my clients are Gen X, and absolutely none of them are in a position to retire or withdraw funds from retirement accounts,” says Liz Windisch, a Denver-based certified financial planner (CFP). “My advice to them is not to take any distributions at this time and wait as long as possible.”
And sometimes, investors still can’t take distributions even if they reach 59 1/2 based on other rules. For example, tax-free Roth distributions must meet the five-year rule (meaning the account has been open for at least five years), and not all employers allow 401(k) distributions while you’re still working.
When to take distributions from retirement accounts is a complicated question that varies for every individual and family. There are a number of factors to consider, including thinking about when you’ll get Social Security, how you’ll pay for Medicare, and your cash flow needs now and in the future, among other things, says Stephen Maggard, one of South Carolina. based CFP.
“Before you even think about taking distributions from retirement accounts, it’s important to build a cash flow plan for the next 15 years,” says Maggard. “Age 60 to 75 is truly a golden opportunity for tax planning. You have a lot of decisions to make that will affect your cash flow, and you can’t take those decisions back.”
Many advisors recommend withdrawing from taxable accounts first, followed by tax-free accounts, or Roth accounts, then and tax-deferred last (that said, tax-deferred and tax-free are interchangeable, depending on your situation personal).
Gen X has no retirement savings
It is especially important to be careful about a generation that is not necessarily ready for retirement. Research — as well as surveys of Gen X savers — has found that this group is falling far short of recommended savings amounts.
There are a number of reasons for this, including that this is the first modern generation that largely had to save for retirement on its own and cannot rely on private pension plans. What’s more, when Gen X got access to accounts like a 401(k), they were relatively new and didn’t have all the features — like auto-enrollment and auto-escalation — that have helped younger generations save more. They also had higher student loan debt than generations before them, on average, and are now facing a cost-of-living crisis as they potentially act as caretakers for both children and parents.
Instead of starting to tap into retirement accounts now, advisers say to do so only in times of emergency.
One way Gen X can better prepare for retirement is to take advantage of supplemental contributions. Those age 50 or older can save more in their tax-advantaged savings accounts than younger investors, up to thousands of dollars each year in the case of a 401(k): while the 401(k)’s contribution limit ) is $23,000 this year. for most people, those over 50 can save an extra $7,500.
Another tip: Focus on lowering taxes, says Andrew Herzog, a Texas-based CFP. Most Americans have all or most of their retirement savings in pre-tax accounts like 401(k)s and traditional IRAs. But this can have major tax implications in retirement, when the bill finally comes due.
“How and when you start withdrawing from retirement accounts has a big impact on your tax bill,” says Herzog.
He suggests looking into Roth conversions, which essentially means moving funds from a pre-tax vehicle to an after-tax vehicle. You will pay tax on the money you convert at your tax rate at the time of conversion and it will then grow tax-free. He suggests starting the conversion the year after your official retirement, when earned income, and therefore your tax rate, is likely to be lower.
“This window of opportunity between retirement and the start of [required minimum distributions] that’s where Roth conversions can be most effective in saving on taxes,” he says. “It’s important to consult a tax professional about this, especially when Social Security payments start, because that will be a new source of income to deal with as well.”
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