Many people work hard to build savings for retirement. And a lot of people who enter retirement with solid nest eggs like to have complete control over their money -- meaning, take withdrawals when they please, but also, leave their funds alone when they're not in need of income.
Unfortunately, with a traditional IRA or 401(k) plan, you don't always get the option to leave your savings intact. Once you turn 73, required minimum distributions (RMDs) are imposed on traditional retirement plans. With a Roth account, you won't have to worry about them.
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The amount of your RMD each year depends on your account balance at the time, as well as your life expectancy. But if you don't have a need for money, being forced to take an RMD can be a huge headache.
That's because RMDs, like all withdrawals from a traditional IRA or 401(k), are subject to taxes. Now it's one thing to pay taxes on a withdrawal representing income you need. But it's another thing to have to remove funds from your retirement plan simply for the heck of it, and then pay the IRS its share.
The good news, though, is that there may be a way for you to avoid RMDs -- at least for a period of time. It may, however, require a shift in your retirement plans.
Working longer could help you postpone your RMDs
Once you reach age 73, you pretty much have to take RMDs from a traditional IRA. But if you have a 401(k), you may be able to get out of your RMD by continuing to work -- or, if you're already retired, going back to work.
If you're still working come age 73, you do not have to take an RMD from the 401(k) your current employer is sponsoring. In that case, your first RMD is due by April 1 of the year after you stop working.
To be clear, in this scenario, you're only let off the hook with regard to RMDs from your current employer's plan. You don't get the same leeway with an old 401(k) from a former employer you may be hanging onto.
Of course, it's not so easy to retire and then return to a job come age 73. So if you know later in life that RMDs are going to be an issue for you, and that you'd like to postpone them as much as possible, then it could pay to continue working into your 70s if you enjoy your job and don't mind plugging away at it a bit longer.
You might enjoy a host of other benefits as well
Not only might working longer help you postpone your RMDs -- at least within the context of your 401(k) -- but it might also help you boost your retirement savings overall. Just as importantly, you'll get the option to leave your nest egg intact for longer since, conceivably, if you're continuing to earn a paycheck, you may not need outside income.
Working longer might also end up being a good thing for your mental and physical health. Many people grow bored easily in retirement and shift to a sedentary lifestyle that isn't particularly good for them. Working longer could keep you active much longer, not to mention help you maintain positive social relationships (assuming you enjoy the company of your colleagues).
The best way to definitively get out of taking RMDs is to house your retirement savings in a Roth IRA or 401(k). But if you don't want to go that route, working longer could help you put off RMDs -- and put off the tax bill that's apt to follow.
