Key Points
If retirement is about a year away, you may be getting increasingly excited by the minute. But if that’s the case, now’s a good time to do an IRA checkup. Here are three key moves to make that could help you approach retirement with more confidence.
1. Check your asset allocation
During your wealth-building years, it’s smart to load up on stocks in an IRA. But if you’re nearing retirement, it may be time to get more conservative.
Keeping 90% of your retirement savings in the stock market exposes you to steep losses in the event of a downturn. So now’s the time to check up on your asset allocation and make sure you’re not taking on too much risk.
2. Figure out a smart withdrawal strategy
You’re not going to spend your entire IRA balance at once in retirement — or at least you shouldn’t. Now’s the time to figure out a withdrawal rate that’s safe without being overly conservative.
That withdrawal rate should hinge heavily on how you have your money invested. If you’ll have a roughly equal split of stocks and bonds in your account, a 4% withdrawal rate may be appropriate. A more conservative asset mix may require a lower withdrawal rate. It’s important to figure this out before you start tapping your IRA.
3. Consider a Roth conversion
If you’re retiring with a large IRA balance, that’s a good thing. But it could also mean large required minimum distributions (RMDs), which could create a tax headache down the line.
Not only can RMDs lead to higher taxes, but they could result in surcharges on your Medicare premiums. So you may want to consider a Roth conversion — if not a full one, then at least a partial one.
A Roth conversion lets you roll funds from a traditional retirement account into a Roth IRA. Once you do so, that money gets to grow tax-free, and withdrawals are tax-free as well. Roth IRAs also don’t impose RMDs, so you’ll have more freedom to withdraw your money (or not) as you wish.
That said, you may actually want to wait to act on a Roth conversion once you stop working, as opposed to right now. If your income is reduced once your paycheck stops, it could offer a more tax-efficient opportunity. So for the time being, you may want to simply look into a Roth conversion and map out a plan for moving forward.
The year before you retire is an important one for your finances. Make these important IRA moves in the coming months so you’re able to enjoy your savings once your time in the workforce is over.
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