13 Dec Where to take cash flow in retirement

Q. I’m retiring and I need to decide where to take my income. I’m 58, have $760,000 in a 401(k), $540,000 in an IRA and $670,000 in mutual funds. What do you think?
— Retiring

A. There’s no one formula for taking retirement income, but there are several important issues to consider before you make a decision.

If your IRA is a rollover from a 401(k) plan, you can combine your IRA with the current 401(k). This will make the funds easier to manage, said Jerry Lynch, a certified financial planner with JFL Total Wealth Management in Boonton.

If your current IRA is from contributions rather than rollovers, you should keep the accounts separate, he said.

“The reason is that IRAs have $1 million in creditor protection and 401(k) plans have unlimited creditor protection,” Lynch said. “If part of the funds come from IRA contributions, you are putting $300,000 potentially at risk.”

While the traditional mindset is to not take the IRA/401(k) money for as long as possible and instead use up your after-tax mutual funds first, Lynch said he’s not a fan of that strategy.

For starters, the year following 70 ½ you are required to take Required Minimum Distributions (RMDs).

“If you do not take the money from there until then, reasonably your account will be around $3.1 million, your RMD would be around $121,000,” he said. “That plus Social Security will put you in a fairly high tax bracket and the RMDs will get larger and larger each year, making your taxable income — and tax rate — much higher.”

Plus, Lynch said, IRAs are not very good inherited assets.

“It’s like passing a hot potato with a big tax liability,” he said. “There is no `step up’ in basis so the entire account is taxed as ordinary income. Mutual funds get a step up so the value at your death is the cost basis for your kids.”

Lynch said part of what you need to do is proactive tax planning in terms of developing a tax-efficient income strategy.

“You don’t want to wing it,” he said, so consider speaking to an advisor who can help.

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This post was first published in December 2016.