What Should I Do With My IRA Once I Retire?

When you retire, you make the final shift 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 the balance between a newfound need for security, since you can no longer wait out downturns and replace losses, and a continued need for growth, since 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 a few things to consider as you approach retirement.

To create a retirement strategy for your own goals, consider speaking with a financial advisor.

Examine a Roth Conversion

First things 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) into a post-tax Roth IRA. While there are tax implications to doing this, there’s no cap on the money that you can roll over.

The advantage to this is that you can partially or entirely eliminate income taxes from your retirement portfolio. The disadvantage is that you will pay full income taxes on all of the money you roll over in the year you do so. And, while your Roth IRA will then continue to grow tax-free, the money you paid on 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 that it will, in fact, work. Note than if you choose to roll your money over 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.

Rebalance for Risk

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

In your working life, your portfolio will be significantly balanced in favor of equities. Many advisors recommend that you hold between 60% and 80% of your retirement portfolio in assets like stocks and index funds while accumulating wealth.

In retirement, your risk profile changes. You no longer have new income with which to replace losses and, arguably more importantly, you no longer have the time to wait out downturns. Even if the market dips, you will still need to cash out assets for your income. This argues for a balance toward security. But at the same time, you will likely need this money for decades to come. Inflation and costs will grow over time, and ideally you want your money to grow at a faster rate. This means you will still need some growth-oriented assets on hand.

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

Manage Your RMDs

Once you reach age 73, the IRS requires you to start taking required minimum distributions (RMDs) from your pre-tax retirement accounts, including traditional IRAs and 401(k)s. These withdrawals are taxed as ordinary income and are mandatory, even if you don’t need the funds to cover living expenses. Missing an RMD or taking too little can result in a steep penalty.

The key to managing RMDs is timing and tax strategy. Many retirees coordinate withdrawals to reduce the overall tax impact. For example, you might delay claiming Social Security or tap taxable investment accounts first to keep your income lower in the early years of retirement. Other retirees spread out withdrawals across multiple accounts to avoid bumping into a higher tax bracket.

It’s also worth looking at how your RMDs fit into your broader income plan. If you have several accounts, you may want to calculate how much you’ll need to take from each to meet your required total while maintaining your preferred investment mix. Some retirees even reinvest their RMDs into taxable accounts or use the money to fund long-term care insurance, charitable gifts or future travel goals.

To estimate how much you’ll need to withdraw from your retirement accounts once you reach RMD age, use SmartAsset’s RMD Calculator.

Required Minimum Distribution (RMD) Calculator

Estimate your next RMD using your age, balance and expected returns.

Quickly estimate your RMDs and when to take them

RMD Amount for IRA(s)

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RMD Amount for 401(k) #1

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RMD Amount for 401(k) #2

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About This Calculator

This calculator estimates RMDs by dividing the user's prior year's Dec. 31 account balance by the IRS Distribution Period based on their age. Users can enter their birth year, prior-year balances and an expected annual return to estimate the timing and amount of future RMDs.

For IRAs (excluding Roth IRAs), users may combine balances and take the total RMD from one or more accounts. For 401(k)s and similar workplace plans*, RMDs must be calculated and taken separately from each account, so balances should be entered individually.

^*The IRS allows those with multiple 403(b) accounts to aggregate their balances and split their RMDs across these accounts.

Assumptions

This calculator assumes users have an RMD age of either 73 or 75. Users born between 1951 and 1959 are required to take their first RMD by April 1 of the year following their 73rd birthday. Users born in 1960 and later must take their first RMD by April 1 of the year following their 75th birthday.

This calculator uses the IRS Uniform Lifetime Table to estimate RMDs. This table generally applies to account owners age 73 or older whose spouse is either less than 10 years younger or not their sole primary beneficiary.

However, if a user's spouse is more than 10 years younger and is their sole primary beneficiary, the IRS Joint and Last Survivor Expectancy Table must be used instead. Likewise, if the user is the beneficiary of an inherited IRA or retirement account, RMDs must be calculated using the IRS Single Life Expectancy Table. In these cases, users will need to calculate their RMD manually or consult a finance professional.

For users already required to take an RMD for the current year, the calculator uses their account balance as of December 31 of the previous year to compute the RMD. For users who haven't yet reached RMD age, the calculator applies their expected annual rate of return to that same prior-year-end balance to project future balances, which are then used to estimate RMDs.

This RMD calculator uses the IRS Uniform Lifetime Table, but certain users may need to use a different IRS table depending on their beneficiary designation or marital status. It's the user's responsibility to confirm which table applies to their situation, and tables may be subject to change.

Actual results may vary based on individual circumstances, future account performance and changes in tax laws or IRS regulations. Estimates provided by this calculator do not guarantee future distribution amounts or account balances. Past performance is not indicative of future results.

SmartAsset.com does not provide legal, tax, accounting or financial advice (except for referring users to third-party advisers registered or chartered as fiduciaries ("Adviser(s)") with a regulatory body in the United States). Articles, opinions and tools are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual. Users should consult their accountant, tax advisor or legal professional to address their particular situation.

Manage Your Taxes

Finally, as you plan for your IRA, make sure to account for taxes. Unless you make a Roth conversion, you will pay income taxes on the money that you regularly withdraw from your IRA. This can catch many retirees by surprise as, without fully realizing it, they plan to live on the full amount that they plan on withdrawing.

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

If you need help planning your taxes and retirement, get matched with a financial advisor today.

Bottom Line

As you enter retirement, it’s important to make a 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 else, do not forget that money management doesn’t end just because work did.

Retirement Tax Management Tips

Managing your taxes in retirement is essential. You will pay taxes on just about every source of income except for Roth portfolios, including Social Security, so make sure that you maximize every advantage that you can get.
A financial advisor can help you build a comprehensive retirement plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.