Will My IRA Last Until I Die?
Individual Retirement Accounts, or IRAs, are tax shelters that help you defer income tax on the savings you have set aside for retirement. When you save money for your retirement, you want to have enough to last you through your lifetime. This will usually require a combination of investments, one of which can be an IRA. Regardless of the withdrawal method you choose, the longer you wait to withdraw your money or take retirement income, the higher the potential income you will receive and the longer it will last. However, the IRS does require that distributions from traditional IRAs begin by age 70 1/2.
Other People Are Reading
-
Lifetime Withdrawals
-
Lifetime withdrawals made in accordance with IRS mortality tables divide up your IRA investment over your estimated life expectency after retirement. The IRS tables, located in the appendix of IRS publication 590 or section 7520, specify how much of your retirement savings you should take in any given year. However, these actuarially determined tables only act as a guide. You could exceed your life expectancy and use up your IRA assets before you die.
Discount Dividend Model
-
The discount dividend model uses just the interest you earn on your investments as income. With this method, you will never run out of money during your lifetime. However, your income fluctuates with the investment returns you earn. Also, this method requires a larger retirement savings than the lifetime withdrawal method using IRS mortality tables.
For example, if you have $1,000,000 in an IRA earning 5 percent interest annually, then the income generated would be $50,000 per year. To generate the same $50,000 from a lifetime withdrawal factor earning the same 5 percent over 30 years would require an investment of only $800,000. Since the IRS requires certain minimum withdrawals by age 70 1/2, this model may not always work for a traditional IRA. However, it can work with a Roth IRA, which does not have minimum withdrawal restrictions.
-
Annuity Payments
-
Alternatively, you can purchase an annuity within your IRA. Annuity payments are similar to a lifetime withdrawal method. The difference is that an insurance company manages the withdrawals for you. Additionally, the insurer promises to pay you an income for as long as you live or for a set period of time. You get to choose the payment structure. If you choose lifetime payments, you will never outlive your savings, but each payment will be smaller.
Distributions from annuities within an IRA are taxed like any other IRA distribution. Life insurance companies will automatically comply with any required minimum distributions when you first set up your annuity with the insurer.
Roth IRA annuities are tax-free, just as any distribution from a Roth would be.
The drawback to an IRA annuity is that you lose control over your savings. You must convert the savings amount to monthly payments, and once you do that, you will not be able to make larger withdrawals should you need to.
Periodic Withdrawals
-
Periodic withdrawals are withdrawals made as needed. This method is not a scheme for sustainable income. Instead, periodic withdrawals assumes that you have other income sources that serve as your primary retirement income, and the withdrawals from your IRA are simply there to supplement the income when you need it.
Whether your IRA will last until you die under this method largely depends on how much you earn in your investments, how much you withdraw and how often. A low interest rate combined with frequent withdrawals that exceed your investment earnings will deplete your IRA quickly. Less frequent withdrawals or withdrawals that do not equal your earnings will stretch the availability of your IRA. Remaining assets can pass to your beneficiary.
-
