Investing 103

As you approach retirement, it is a good idea to reevaluate your investment strategy. Sometimes, that growth focused investment strategy that you had during your working years may need to be adjusted. Goals in retirement may shift from growth to income generation and capital preservation.

Traditional and Roth IRAs are both tax-advantaged accounts designed for retirement savings. Traditional IRAs grow tax deferred while Roth IRA distributions, including the gains, are tax free after the account has been held for 5 years. The contributions in a Roth are tax free regardless of how long the account has been held.

Contributions to a Roth IRA have income limits. Depending on your modified adjusted gross income (MAGI), you may not be able to contribute to a Roth or may only be able to contribute a reduced amount. Traditional IRAs do not have income limits so if your income is over the limit, you can still contribute to a Traditional IRA. If a Roth IRA is preferred, a Roth conversion could be an option.

IRAs are not investments on their own but investments can be held within them. Many investments can be held in an IRA including stocks, mutual funds, ETFs, cash, CDs and more.

Traditional IRA distributions do not affect eligibility for Social Security. However, these distributions will affect your adjusted gross income, which could have potential tax consequences. If you are taking distributions from a Roth IRA, withdrawal of contributions is always tax free and earnings are only taxed if the Roth has not been held for 5 years. Because of this, it is unlikely that Roth distributions will affect Social Security benefits.

Beginning in the year you reach age 73, you must start taking required minimum distributions (RMD) from traditional IRAs and tax deferred employer sponsored retirement plans. RMDs are not required for Roth accounts unless you are the beneficiary of the Roth. The total RMD is calculated by dividing the balance of traditional IRAs and employer sponsored plans on December 31st of the previous year and dividing that balance by your life expectancy factor, which is set by the IRS. For example, if you had $500,000 in a traditional IRA on December 31st of the previous year and you have a life expectancy factor of 22, the RMD calculation would look like this: $500,000 / 22 = $22,727.27

In this example, you must take a distribution of $22,727.27 for the year. This is taxed at your marginal tax rate.

The numerical life expectancy factor goes down every year as you get older, which means that a higher percentage of the previous year’s balance must be distributed every year.

One potential strategy is to contribute regularly to a Roth IRA whenever you’re eligible. Because Roth IRAs grow tax-free and qualified withdrawals are tax-free in retirement, consistently contributing, especially in your early working years, can create a valuable source of tax-free income later. Even small, steady contributions can grow significantly over time thanks to compound growth.

Another strategy is Roth conversions, where you move money from a Traditional IRA or 401(k) into a Roth IRA and pay taxes today in exchange for tax-free income later. This can make sense in years when your income, and therefore your tax rate, is lower than you expect it will be in retirement. Strategic conversions over time can also help reduce future required minimum distributions and give you more flexibility in managing your tax bill during retirement. Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.

Roth IRAs can be used as a tool to manage taxes throughout retirement. Because withdrawals aren’t taxable, they can help you avoid pushing yourself into a higher tax bracket, triggering Medicare surcharges, or increasing the taxable portion of your Social Security benefits. Having both taxable and tax-free income sources gives you more control and makes your retirement income plan more flexible and resilient. A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.

An in-service distribution is a withdrawal of money from a retirement plan, such as a 401(k), while you are still working for the employer offering the plan. Not all plans offer this option; it depends on the employer's plan rules and sometimes your age or years of service. You will need to check with your plan administrator to find out if your plan offers in-service distributions.

People might take an in-service distribution to access funds early or to roll money into an IRA or another retirement account. It's important to understand the tax consequences and possible penalties before taking one, as early withdrawals from retirement accounts often incur taxes and fees.

Knowing when you’re truly ready to retire involves more than just reaching a certain age. It’s about financial readiness, emotional preparedness, and clarity around how you want your next chapter to look. The financial side typically starts with understanding whether your savings, investments, pensions, and Social Security benefits can support the lifestyle you want throughout retirement. This includes accounting for healthcare costs, inflation, taxes, and how long your money may need to last. Many people find it helpful to create a retirement income plan that shows how much they can safely withdraw each year without putting their long-term security at risk.

Beyond the numbers, it’s equally important to evaluate your personal readiness. Retirement is a major life transition, and your daily routine, social connections, and sense of purpose may change significantly. Thinking ahead about how you want to spend your time, whether through hobbies, travel, volunteering, part-time work, or family activities can make the shift much smoother. People who retire successfully often have a clear vision for how they’ll stay active, connected, and fulfilled.

Another key factor is understanding your comfort with the uncertainties that come with retirement. Markets will fluctuate, unexpected expenses may arise, and long-term planning needs may shift over time. If you feel confident in your financial plan, have a strategy for adjusting when needed, and feel comfortable transitioning into a new lifestyle, you’re likely closer to being ready than you think.

Ultimately, retirement readiness is a balance of financial stability and personal confidence. A comprehensive retirement plan, ideally developed with a financial advisor, can help you see where you stand today, identify any gaps, and give you a roadmap toward a retirement that feels both secure and meaningful.

Key Questions to Ask Yourself

• Do I have enough savings and income streams to support my retirement lifestyle for potentially several decades?

• Have I accounted for taxes, healthcare, inflation, and unexpected costs?

• Do I have a withdrawal strategy in place, and do I know when to start taking Social Security or pension benefits?

• Am I emotionally ready to leave work and pursue other interests or activities?

If you can answer yes to these questions and feel confident in your plans, both financially and personally, you are likely well on your way to being ready for retirement. Always consider seeking a second opinion from a financial advisor to ensure your plan is realistic and sustainable.

The Income-Related Monthly Adjustment Amount, or IRMAA, is an extra charge added to your Medicare Part B and Part D premiums if your income exceeds certain IRS thresholds. These thresholds are based on your Modified Adjusted Gross Income (MAGI) from two years prior. The higher your income, the higher the IRMAA surcharge.

IRMAA is often triggered by events that temporarily increase your income, such as large IRA withdrawals, Roth conversions, capital gains from selling investments, or even the sale of real estate. Because IRMAA can significantly increase your monthly Medicare costs, planning ahead can help you avoid unwanted surprises.

Several strategies can help reduce the chance of triggering IRMAA. Managing taxable income through thoughtful withdrawal planning, such as using Roth IRAs for tax-free income or spreading Roth conversions over several years, can help keep your income below key thresholds. Tax-loss harvesting, careful timing of investment sales, making charitable contributions with appreciated assets rather than cash and using Qualified Charitable Distributions (QCDs) to reduce taxable IRA income can also be effective strategies. If you plan to sell your home, take advantage of the home sale tax exclusion.

If you experience a qualifying life-changing event, such as retirement, marriage, divorce, or the death of a spouse, you may be able to appeal your IRMAA determination. By submitting the appropriate form to the Social Security Administration, you may have your IRMAA reduced or removed.