What to Do With Your IRA if You're 5 Years Away From Retirement

If you're about five years away from retirement, you may be getting increasingly excited about the idea of not going to work every day and enjoying more free time. But if you're that close to ending your career, it's important to focus on certain aspects of retirement planning, from claiming Social Security to signing up for Medicare.

It's also a good time to take a close look at your IRA. Here are a few specific moves to make.

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1. Make sure your investment mix isn't too risky

At this point in your savings journey, your goal may not be to supercharge your IRA balance so much as protect what you've built. To that end, it's important to review your asset mix and ensure it's not overly risky.

If you invested heavily in stocks during your wealth-building years, now may be the time to start scaling back. That doesn't mean you should dump your stocks completely, because you still want your IRA to continue to grow in retirement. But you should also prepare to take on some risk if you're getting closer to tapping your savings for income.

Figure out how much of your retirement savings you're comfortable keeping in the stock market and start working toward that allocation. If your IRA is currently 90% stocks but you want to end up with 50% of your portfolio in stocks by the time you retire, you should spend the next five years gradually making that change.

It's also a good idea to shift some of your assets into cash. That way, if there's a market downturn early on in retirement, you'll have options for covering expenses without having to sell investments at a loss.

2. Maximize contributions while you can

If you're still working, the years leading up to retirement are often your best opportunity to strengthen your IRA balance. If you're 50 or older, you can make catch-up contributions in your IRA, which brings your total allowable contribution this year to $8,600.

Even if your IRA is already in good shape, it never hurts to add to your balance so you have even more leeway to cover extra costs in retirement. Plus, if you're funding a traditional IRA, the money you put in can serve as a tax break.

3. Start mapping out a withdrawal and tax strategy

If you're getting close to retiring, it's important to figure out how much income to expect out of your IRA and how much you can safely withdraw to avoid running out of money prematurely.

You may decide to fall back on the popular 4% rule, which has you withdrawing 4% of your savings your first year of retirement and adjusting future withdrawals for inflation. Or, there may be a different rate you're more comfortable with.

It's also important to understand how IRA withdrawals will affect your taxes. If you have a Roth IRA, your withdrawals are yours to take tax-free. But if you have a traditional IRA, you'll want to be mindful of how your withdrawals impact your tax bracket. Combining withdrawals with Social Security could end up putting you in a higher bracket than expected.

That could also influence what you pay for Medicare. Higher-income seniors can face surcharges on their premiums known as IRMAAs, or income-related monthly adjustment amounts. If your planned IRA withdrawals plus other income like Social Security push you into IRMAA territory, you may want to rethink your plans or at least prepare accordingly.

The next five years matter

The moves you make in the years leading up to retirement could have a huge influence on your future finances. Review your IRA's investment mix, keep contributing, and come up with a withdrawal plan. Doing these things now could help you feel more confident once retirement actually kicks off.

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