How should you manage your IRA?

When you retire, you make the final transition from the era of wealth accumulation to wealth management.

This is a big deal. Managing your IRA in retirement is an important project. You want to strike a balance between a new need for security because you can no longer wait for crises and replace losses and a continued need for growth because you will need this money for decades to come. Every household will have a different answer for how they want to manage their money, but here are some things to consider as you approach retirement.

To create a retirement strategy for your own goals, consider talking to a financial advisor.

Consider a Roth conversion

First, it’s worth doing the math for a Roth IRA conversion.

At any time, including when you retire, you can roll over your tax-advantaged retirement accounts from a pre-tax account (such as a 401(k) or IRA) to an after-tax Roth IRA. While there are tax implications for doing so, there is no cap on the money you can transfer.

The advantage of this is that you can partially or completely eliminate income taxes from your retirement portfolio. The downside is that you’ll pay full income taxes on any money you roll over in the year you do so. And while the Roth IRA will continue to grow tax-free, the money you paid for that conversion could also have continued to grow. So there is both a present cost and an opportunity cost.

If a Roth conversion works, it can be a significant long-term advantage. Just make sure it will actually work. Note that if you choose to roll over your money to a Roth, you may have to leave the money for five years before withdrawing to avoid penalties. A financial advisor can discuss the rules of retirement accounts with you.

Rebalancing for risk

Portfolio balance refers to the percentage of assets that make up the various sections of your retirement portfolio, such as stocks, funds and bonds.

In professional life, your portfolio will be significantly balanced in favor of stocks. Many advisors recommend holding 60% to 80% of your retirement portfolio in assets like stocks and index funds while you build wealth.

In retirement, your risk profile changes. You no longer have new revenue to replace losses and, perhaps more importantly, you no longer have time to wait out crises. Even if the market goes down, you will still need to cash in assets for income. This advocates a balance towards security. But at the same time, you’ll probably need that money for decades to come. Inflation and costs will increase over time, and ideally you want your money to grow at a faster rate. This means you’ll still need some growth-oriented assets on hand.

The story continues

So as you retire, rebalance your IRA based on those needs. On average, in retirement you want your IRA to hold between 40% and 70% in low-risk assets such as bonds. Create a specific plan that meets your inflation and wealth management needs while anticipating your risk management needs.

Balance your portfolios and RMDs

The IRA can be just one of several retirement portfolios you manage. For example, you may have a 401(k) fund or a fully taxed portfolio that you’ve used to build wealth.

Households that have multiple portfolios often build a plan to use one at a time so that their other portfolios can maintain the highest possible returns. (Think of it, essentially, as a reverse snowball method.) This is a good approach, but it’s important to have a strategy for which portfolios you will withdraw, when, and why.

If you do this, be sure to account for required minimum distributions (RMDs). At age 73, the IRS will require you to take a minimum amount per year from each of your pre-tax accounts, including IRAs. You can manage this money however you want once you take it out, but you will have to withdraw it.

Talk to a financial advisor about the best ways to structure your RMDs.

Manage your taxes

Finally, as you plan your IRA, be sure to factor in taxes. Unless you do a Roth conversion, you’ll pay income taxes on the money you regularly withdraw from your IRA. This can catch many retirees by surprise because, without fully realizing it, they plan to live off the full amount they plan to withdraw.

Calculate the taxes you’ll pay on your IRA withdrawals so you can plan to live off that income rather than your hypothetical pre-tax income. This will reflect your true financial position in retirement and is worth understanding.

If you need help with tax and retirement planning, call a financial advisor today.

conclusion

As you enter retirement, it’s important to plan for your various retirement accounts. Look at rebalancing your assets, consider a Roth conversion, and make a long-term plan for your taxes and lifestyle. And above all, remember that managing money doesn’t end just because work did.

Pensions tax management tips

• Managing your retirement taxes is essential. You’ll pay taxes on almost every source of income except Roth portfolios, including Social Security, so make sure you’re maximizing every advantage you can get.

• A financial advisor can help you build a comprehensive retirement plan. Finding a financial advisor doesn’t have to be difficult. The free SmartAsset tool matches you with up to three verified financial advisors serving your area, and you can have a free introductory call with your matched advisors to decide which one you think is right for you. If you’re ready to find an advisor who can help reach your financial goals, get started now.

• Keep an emergency fund handy in case you face unexpected expenses. An emergency fund should be liquid — in an account that isn’t exposed to significant fluctuations, such as the stock market. The trade-off is that the value of liquid cash can be eroded by inflation. But a high interest account allows you to earn compound interest. Compare savings accounts from these banks.

• Are you a financial advisor looking to grow your business? SmartAsset AMP helps advisors connect with prospects and offers marketing automation solutions so you can spend more time converting. Learn more about SmartAsset AMP.

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