In last week’s blog, I introduced some thoughts and methods of tapping into your savings to create a retirement paycheck. This week, we will look at the Method #1. This is the first method just because it’s kind of the standard one people default to. It’s not necessarily the best for you.
Method 1: Taxable (non-retirement) accounts first, Tax-deferred accounts second, Roth accounts last.
Pros:
- Allows retirement accounts to grow for the longest time tax-deferred/free.
- May allow Roth money to be passed on to heirs.
- Lower tax bills in early retirement when you may be spending more on travel/hobbies.
- Could have advantages on taxable Social Security calculations early in retirement.
Cons:
- Continuing to grow tax-deferred accounts may push you into a higher tax bracket when MRDs are required at age 73.
- Heirs may end up paying income tax on tax-deferred accounts.
- Unpredictable tax bills through retirement
People using this method often are wanting to maximize the tax benefits of retirement accounts for as long as possible. Even into the next generation. It’s possible that they may not ever reap the benefits of the tax-free Roth accounts themselves.
Next week, Method #2!
