We're just a few days from a major Baby Boomer landmark: On July 1, 2005, the very first Boomer turns 59 1/2, and is thus eligible to take money out of various retirement plans, penalty-free.
And there actually is a first Baby Boomer—Kathleen Casey, born seconds after midnight on January 1, 1946. She was hunted down some years ago by an enterprising reporter at Money magazine. You can argue whether she was a "typical" Boomer or not: The daughter of a World War II veteran, she danced as a teenager on American Bandstand. By 20 she was married to a physician who was on his way to Vietnam. Unlike others of her generation, she says she never openly protested the war and she never took illegal drugs.
She and her husband eventually had two children before divorcing. She shed the traditional housewife role, and worked in several careers, such as restaurant management, before earning a master's in health education and becoming a teacher in the greater Philadelphia area. She also remarried. When interviewed at her 50th birthday, she sounded content with her life.
We couldn't reach Kathleen Casey—she apparently has been happy staying out of the limelight, has an unlisted phone number, and doesn't seem to have given an interview in the past nine years. However, in her honor, we're going to focus this issue of One on One on Boomers on taking money out of a retirement plan, since that's something Ms. Casey has to think about.
We fortunately had no trouble reaching Barry C. Picker, CPA/PFS, CFP (www.bpickercpa.com), who is widely known as one of the leading experts on tax and IRA issues. A member of the New York State Society of CPAs Estate Planning Committee, he's the authority Fortune, Worth, The Wall Street Journal, Investors Business Daily, New York Times and Newsweek have called to get the answers.
Q:
Do you think there are a lot of Boomers who aren't aware of the rules regarding distributions—when they are ALLOWED to take out money and when they MUST take out money?
A:
There is a lot of confusion and misunderstanding—not only on the part of Baby Boomers but on the part of their advisors as well. For example, let's say a client has already started taking out 72(t) distributions before 59 1/2. You have to do this for the longer of 5 years or until 59.5. So for someone who started those distributions that at age 55 or later, the 59 1/2 date doesn't change anything—although many think it does.
Q:
Even if Boomers are aware of the rules, are they confused about what to do with the money—how to invest it? Should they just leave it where it is or find other places to put it?
A:
There is definitely confusion here. The preferred strategy is to leave money where it as long as possible. If you don't need it, don't take it until 70 1/2. Sometimes we see people who believe it should come out early, or you'll end up having to take too much as a minimum distribution when you're 70 1/2, creating tax problems. But that's usually that's not the case. Even if it pushes you to a higher bracket latter, it usually isn't worth it.
Q:
Never mind the Boomers themselves—what about the advisors? Are they going to be overwhelmed with clients clamoring for information?
A:
A lot of advisors need to educate themselves further. Not just at the 59 1/2 level, but across all ages. Even major financial institutions sometimes fail to make the rules clear to investors.
Q:
Is the fact that Boomers can start taking out money likely to affect them psychologically, thinking about when and how they want to retire?
A:
This is just a guess on my part, but I don't think that 59 1/2 is going to be the big trigger. Qualifying for Social Security will probably be a bigger deal.
Q:
What is the stupidest thing you can do with your money at 59 1/2?
A:
Take it all out and spend it.