Fulfillment and Functionality

Order of withdrawals: 

Retirees often hold assets in different types of accounts—taxable, tax-deferred (401(k), traditional IRA), and tax-free (Roth IRA). Managing how and when you take money from these accounts affects your tax situation and how long your assets last.

Taxable accounts: 

These accounts are usually tapped first because capital gains and dividends may be taxed at lower rates than ordinary income.

Tax-deferred accounts: 

Withdrawals from traditional IRAs or 401(k)s are taxed as ordinary income, so you’ll want to manage how much you take to avoid getting bumped into a higher tax bracket.

Roth accounts: 

Since withdrawals from Roth IRAs are tax-free, many retirees leave these for later in retirement or as a legacy for heirs to minimize their overall tax burden.

Once you reach age 73, the IRS requires you to take RMDs from tax-deferred accounts like traditional IRAs and 401(k)s. This is a critical part of asset distribution because:

• Failing to take RMDs results in hefty penalties (up to 50% of the amount not withdrawn).
• RMDs are taxed as ordinary income, so they can push you into a higher tax bracket if not managed carefully.

Asset allocation: 

In retirement, you need to balance assets that generate income (like bonds, dividends, or real estate) with those that offer growth potential (like stocks) to protect against inflation.

A key part of asset distribution is making sure your portfolio is structured to provide enough income to cover your expenses while still maintaining enough growth to ensure your money lasts through retirement.

Bucket strategy: 

Some retirees use this method to allocate assets for different time horizons (e.g., cash for short-term needs, bonds for medium-term, and stocks for long-term growth).

Qualified Charitable Distributions (QCDs): 

If you’re over 70½, you can make charitable donations directly from your IRA. These distributions don’t count as taxable income, which can help lower your tax liability and reduce the impact of RMDs.

Donor-Advised Funds (DAFs): 

These allow you to donate a lump sum in a high-income year and take the tax deduction, while distributing the funds to charities over time.

Wills and trusts: 

A major component of asset distribution is deciding how your assets will be passed on after your death. This can involve drafting a will or setting up trusts to ensure your wealth is distributed according to your wishes while minimizing estate taxes and avoiding probate.

Living trust: 

This allows you to transfer assets to heirs more smoothly and avoid probate court, making it easier for beneficiaries to access the assets.

Revocable vs. irrevocable trusts: 

Revocable trusts give you flexibility while you’re alive, whereas irrevocable trusts can offer tax advantages and asset protection.

Beneficiary designations: 

Make sure your beneficiaries are up to date on all accounts (401(k), IRA, life insurance). Assets in these accounts pass directly to the named beneficiaries, bypassing probate.

Transfer on death (TOD) accounts: 

These accounts automatically pass to the designated person upon your death, also avoiding probate.

Step-up in basis: 

When passing on appreciated assets like stocks or real estate, your heirs may receive a "step-up" in cost basis, meaning they don’t have to pay capital gains taxes on the appreciation that occurred during your lifetime. This is an important aspect of tax-efficient asset distribution.

Gift tax exclusions: 

You can distribute some of your assets to your heirs during your lifetime by taking advantage of gift tax exclusions, which allow you to give up to a certain amount ($17,000 per person in 2023) without triggering gift taxes.

Setting aside assets for healthcare: 

Given that healthcare costs rise significantly in retirement, part of asset distribution planning involves setting aside funds to cover these expenses, especially for long-term care.

Medicaid spend-down strategies: 

If long-term care could deplete your assets, some retirees use Medicaid planning strategies to legally transfer or spend down assets to qualify for Medicaid, which covers long-term care.

Some retirees allocate a portion of their assets to annuities, which can provide a guaranteed income stream for life. This can reduce the risk of running out of money and help with budgeting for fixed expenses.

Immediate annuities: 

These start paying out immediately after you purchase them, converting a lump sum into monthly income.

Deferred annuities: 

These start paying at a later date, offering tax deferral until you begin receiving payments.

Ensuring access to cash: 

As part of your asset distribution, you’ll need to make sure you have enough liquid assets (like cash or short-term bonds) to cover immediate needs and unexpected expenses. Tying up too much in illiquid assets like real estate could put you at risk if you need cash quickly.

If you own property, you’ll need to consider how it fits into your overall asset distribution plan.

Downsizing: 

Some retirees choose to sell their primary residence and move into a smaller home or a lower-cost area to free up capital.

Reverse mortgage: 

This allows you to tap into your home’s equity without selling it, providing additional income in retirement.

Rental income: 

If you have additional properties, rental income can provide a steady cash flow. You’ll need to weigh the benefits against the hassle and costs of managing property.

As part of asset distribution, retirees should assess any remaining debt. Paying off high-interest debt (like credit cards) before retirement is usually a priority, but for low-interest debts (like a mortgage), some retirees may choose to continue payments rather than deplete investment assets prematurely.