Generate Retirement Income From Your IRA

Couple working with a financial advisorWhen retirement is just around the bend, it's time to shift your focus from accumulating assets to turning those assets into a source of income so that you enjoy your years in retirement. Your retirement income strategy should have two main objectives: making sure your money will last at least as long as you do and maintaining your purchasing power in the face of inflation.

Retirement income planning poses challenges

To craft a good retirement income strategy, you need to ask yourself a number of important questions. For example, when will you really be able to afford to retire? How much income can you expect to receive from your invested assets, pensions, Social Security and other sources? How should you invest going forward? Should you convert any assets to lifetime income in the form of a guaranteed lifetime income stream? When should you start taking Social Security, and how will the amount of your benefit be affected by your start date? What will your expenses be like after you retire?

Your income planning should include building a budget for known and unknown expenses, a valuable tool for managing your cash flow.

All this planning can be complex and time-consuming. However, one way you can save yourself time and effort is by consolidating retirement assets from multiple accounts into a single IRA.

Why consolidating assets can make sense

Consolidating assets into a single IRA offers these benefits for generating retirement income:

  • An easier way to build and follow a retirement income strategy: Consolidating can simplify your income planning, and taking withdrawals from one account is less cumbersome than withdrawing from multiple accounts.
  • Streamlined investment planning: If you have retirement assets with multiple financial providers, you might find it difficult to maintain a consistent, comprehensive investment strategy. Consolidating assets with one provider can help you create a single, integrated allocation strategy that's in line with your investment goals, risk tolerance and time horizon. With one account, reviewing your assets and rebalancing can be much more efficient.
  • Simplified recordkeeping: If you consolidate assets with a single financial services company, you will receive a single statement from one carrier instead of several statements from multiple carriers. Monitoring your investments becomes easier this way.
  • Reduced expenses: If you have assets in more than one retirement plan, you're probably paying fees for each plan. This can result in higher costs than if you have all your assets with a single provider.

Using your IRA as an income bridge to a higher Social Security benefit

You can elect to start receiving your Social Security retirement benefit as early as age 62, but there may be financial advantages to waiting until "full retirement age," the age at which you can receive a full benefit. Full retirement age increases based on when you were born and ranges from age 65 to 67. If you wait beyond full retirement age to claim your benefit, the benefit will increase even more each year until you reach age 70. You can find out your full retirement age here, and you can read more about deciding when to claim Social Security.

It's easier to put off receiving Social Security when you have assets in a consolidated IRA to make up for at least some of the Social Security income you would otherwise be receiving. You get all the advantages of consolidation as outlined above while maximizing your Social Security benefit.

Just be sure you understand all the costs of consolidating. For example, some IRAs, tax-deferred plan contracts and mutual funds have withdrawal penalties and back-end loads that may take a substantial bite out of your assets.

Roth IRAs and retirement income

Generally, assets from any Traditional IRA or non-Roth assets held in an employer-sponsored retirement savings plan can be converted to a Roth IRA. A Roth IRA can be a good vehicle for consolidating retirement assets, for these main reasons:

  • Tax-free distributions: Because qualified distributions from a Roth IRA are tax-free, investing in a Roth offers diversification in retirement planning tax strategies. As a Roth IRA owner, you can withdraw your contributions at any time without owing any federal income tax or penalty. Also, if you meet certain preconditions – basically, once you've held your account at least five years and through age 59½ -- you can withdraw earnings without owing any federal income tax or penalty. With a pretax Traditional IRA, distributions are subject to federal income tax, and generally, distributions before age 59½ are also subject to a 10% early-withdrawal penalty.
  • No required withdrawals. A Roth IRA is exempt from the standard requirement to start taking IRA and savings plan distributions after age 70½. In fact, you can leave your assets in a Roth IRA as long as you like. This makes a Roth IRA a good vehicle for holding assets that you’d like to hand down to heirs or to a charitable organization, rather than living on in retirement.
  • No triggering of tax on Social Security benefits. Unlike distributions from a Traditional IRA, Roth IRA distributions will not trigger or increase the taxation of any Social Security benefits you're receiving at the same time. If your only sources of retirement income are your Roth IRA distributions and Social Security benefits, your Social Security benefits will not be taxed.

Keep in mind that the short-term tax costs of a Roth IRA conversion can be significant. When you convert, you pay taxes on contributions you previously deducted as well as on any accumulated earnings. A conversion can also push you into a higher tax bracket, especially if you're converting a large amount of money. Finally, a separate five year holding period applies to Roth conversions to avoid potential penalties for distribution of converted money before age 59 1/2. Consult your tax advisor about your situation.

Choosing a financial firm for your consolidated assets

Some financial firms offer more options for receiving retirement income than others. The financial strength of the financial firm might also be a consideration. Think about consolidating assets with a company that offers a variety of income options, such as annuities and systematic withdrawals, so you can better tailor your income strategy to your needs.

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