Maximize your retirement income: smart strategies at 60-— Catherine Fredman

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Individual retirement accounts, or IRAs, are among the most valuable assets most of us own. Yet after years of religiously putting money into their IRAs, many people are confused about the best way to withdraw funds from them.

According to government regulations, you may begin tapping your IRA without a penalty at age 59½, and you must start taking required minimum distributions (RMDs) at age 70, or pay a substantial penalty. (401(k)s are subject to the same rules.)
But withdrawal isn’t as simple as opening the savings spigot. How and when you take your RMDs can affect your Medicare premiums, your taxes, and the amount of money you can leave to your heirs or charity.
Following these smart strategies when you turn 60 can help you maximize your RMDs later.

Don’t act too quickly Having passed the 59½ mark, you’re now eligible to take penalty-free withdrawals from your retirement accounts. But just because you can doesn’t mean you should. You’re giving up tax-deferred growth – ten years’ worth of it, if you can afford to wait until 70.   Consolidate your retirement accounts If you’ve changed jobs, you know how your retirement accounts can pile up. Consolidating accounts makes it easier to track your investments, avoid over-diversification or repetition of your investments, and reduce fees.
Re-evaluate your retirement portfolio Ensure that your portfolio has the appropriate asset allocation for your time horizon and the right asset location: Are your assets situated to maximize tax-efficiency? “At this time in life, people start to buy taxable bond funds and dividend funds in their outside (non-IRA) accounts to focus on income, but that makes their portfolio less tax-efficient,” notes Colleen Jaconetti, senior investment analyst with Vanguard. Withdrawals from an IRA are taxed as ordinary income, which is usually at a higher rate than the 15 and 20 percent tax on long-term capital gains and dividend income, respectively. Jaconetti recommends shifting investments that might generate short-term capital gains (i.e., stocks and mutual funds that would be owned for less than a year as well as taxable bonds and real estate investment trusts) to tax-deferred accounts to shelter the income. Conversely, any funds where you expect to realize long-term capital gains or dividend income should be held in a taxable account.
Keep making those IRA contributions You’ve got another 10 years of tax-deferred growth, so keep funding your IRA and your spouse’s. As 60-somethings, you are entitled to a catch-up contribution and can each contribute $6,500 annually.
Calculate your RMDs in advance Many financial services websites have a calculator accessible to anyone. So if you’re 60 and have $100,000 in your IRA, with a 5 percent estimated rate of return, you can figure that your RMD starting at age 71 will be about $6,400. Why do this? It’s not what you might think.
The prospect of being bumped into a higher tax bracket when RMDs start adding to your income is actually not a big deal. The tax rate for married couples filing jointly is 15 percent for an annual income of less than $73,800; between that amount and $148,850, the tax rate is 25 percent but that applies only to the amount above $73,800.
A bigger deal is that higher RMDs can cause Social Security income to be taxed at a higher rate. For married couples filing jointly with an income between $32,000 and $44,000, up to 50 percent of Social Security income may be taxable. Above $44,000, up to 85 percent may be taxable. Consult a financial adviser to determine whether the magnitude of the increase in taxes is worth the time and effort.
Decide whether to convert to a Roth IRA One solution to a burgeoning tax bill in retirement: Convert all or part of your traditional IRA to a Roth IRA. Roth IRAs have one big advantage over traditional IRAs: There are no RMDs—ever. And because the Roth IRA requires you to pay taxes upfront, either before you contribute to the account or when you convert from your traditional IRA to a Roth, any distributions you choose to take are tax-free. Finally, earnings in the Roth IRA continue to grow tax-free for your beneficiaries after your death and they can make withdrawals tax-free.
The trade-off, however, is that while you may reduce your taxes later on, you’ll give up tax-deferred growth. Meanwhile, you’ll have to pay the income taxes you did not pay when you originally contributed the money—and that can be a hefty sum.
If you think a Roth IRA is right for you, one solution is to do a partial conversion. One way: Use a tax refund or a financial windfall to cover the tax bill on an equivalent amount in your IRA. You won’t miss the money, you’ll lower your eventual IRA RMDs, and you’ll leave a nice gift for your heirs.

Culled from Consumer Reports: