Smart strategies for when you turn 65 and 70 1/2

Many people assume that all of the decisions about their retirement income are set in stone by the time they reach 65. Many of those people are wrong. Some of the most important moves you can make with your individual retirement account (IRA) occur between 65 and 70½.

According to government regulations, you may begin tapping your IRA without a penalty at age 59½, and you must start taking required minimum distributions (RMDs) at age 70½ , or pay a substantial penalty. (401(k)s are subject to the same rules.)

To learn more about preparing for your financial future, read "Smart Strategies for When You Turn 60."

One of the major milestones of retirement planning is the age at which you're eligible for full retirement benefits from Social Security. (If you were born after 1937, your full retirement age will be older than age 65, on a sliding scale going up to 67 if you were born in 1960 or later.) With that milestone comes a major decision: Should you take Social Security at full retirement age or wait and tap your IRA instead? Figuring out which financial faucet to turn on first is a balancing act.

• Tap your IRA now to reduce your future RMD. If you expect a large RMD, this strategy has obvious attractions. At the same time, delaying Social Security benefits from your full retirement age until you are 70 will bump up the payout by 8 percent every year—a locked-in rate of return that may not be matched by your investment portfolio. However, warns Marcia Mantell, a retirement specialist in Needham, Mass., "Taking more from your IRA initially is not sustainable. It's a bridge strategy."
• Consider the consequences for your Medicare premium. When you enroll in Medicare, your income from two years ago will affect your Part B premium, which covers doctors and most other outpatient care. Tapping your IRA during this period could cost you, says Dana Anspach, founder of Sensible Money, an investment advisory firm based in Scottsdale, Ariz. "If your modified gross income is higher than $85,000 for individuals or $170,000 for married tax filers," she says, "then your Medicare Part B premiums will go up" above the standard $104.90 per month.

One solution: Convert your traditional IRA to a Roth IRA. Roth IRA withdrawals don't affect your Medicare Part B premiums. A Roth conversion will increase your modified adjusted gross income (MAGI) in the current tax year, but because Roth IRA withdrawals are tax-free, your MAGI will be lower in future years. Consult a financial adviser to see whether it's worth it. 

At 70 ½, the amount of money in your retirement reservoir is pretty much set. Now, the big question is how to channel the income stream.

• Make the calendar work for you. RMDs don't kick in until you're 70 ½, but you have until April 1 of the following year to take your first distribution. The downside of delaying is that you have to take that year's distribution in the same year as the next one—which can result in a double whammy to your tax liability. Mantell suggests that you take the first RMD by December 31 of the year in which you turn 70½, no matter when your birthday falls, so you'll be taking just one RMD annually in subsequent years.
• Annuitize your distribution. Take the RMD as equal periodic payments. That produces a nice income stream, and you'll be able to benefit from reverse dollar cost-averaging. Furthermore, if the market tanks before your distribution, the principal won't suffer as big a bite.
• Do good with your RMD. If you don't need the money, use your RMD as your charity cash stash. Thanks to the passage of the America Gives More Act of 2015, individual taxpayers aged 70 ½ and older can donate up to $100,000 from their IRAs to charitable non-profits tax-free. 
• Don't procrastinate. Make sure you are taking all your RMDs on time and in the right amounts. The IRS is cracking down on IRA accounting mistakes. People who fail to take their RMDs can be hit with a penalty of 50 percent of the amount they should have withdrawn – and there's no statute of limitations. This is another good reason to consolidate multiple IRAs for easier bookkeeping.