Financial Advice

When we met with the financial advisor, most of what he said was things we already knew. He fleshed them out with details, and occasionally observations that we'd known, but hadn't thought of in just that way. For example, when we were discussing which of the sources of money/income we should plan to draw down first when in full (ie, both of us) retirement, he said to start with the Roth IRA money. We knew that; it's already been taxed, so there is no tax advantage to waiting. But what he said was "The government's already gotten their money. They won't care when, or even if, you draw it down." Oh, yeah...

But something he said, we had not only not realized, but was exactly the opposite of what I'd thought. In thinking about that same question, I'd assumed that we would want to draw down on our 401(k) savings last, because that money was not yet taxed; consequently, we'd want to draw on it when our tax rate (which is determined mostly by income) is the lowest. He said Not necessarily. He told us that we need to understand that there is a limit to how long we can wait before doing that -- I had known that; its the magic 70 1/2 age (unless you're still working), and I don't think we'll have any problem doing withdrawals before then -- but he also said that there is a minimum that you must withdraw. If you don't, he said, the IRA can actually penalize you. The penalty is half of the amount of the minimum of the withdrawal that you didn't take. That's not 50% of the difference between what you did withdraw and what you should have, though that'd be bad enough -- its 50% of the required minimum, period.

Got my attention....

He went on to say that we'd want to size those withdrawals with an eye to the effect on total income in later years, so that our tax rate, year after year, will be the minimum possible. With that one statement, he made the likelihood that we'll hire him much more likely. Our attitude toward taxes has always been Tell me the bill, and I'll pay it. We knew it was possible to 'arrange things' so that we paid less taxes over all, but we had very little clue on how to do it.

We're not going to leap into this, but it was interesting information, and I thought it might be of general interest.