Welcome back. For those of you who have stuck with this series, you are rounding 3rd base! Almost through the quick tutorial to help decide what order to tap your savings for retirement.
Withdrawal Method #3: Pro Rata. Take withdrawals each year proportionately from the 3 types of accounts.
Example: Joe and Sue have 50% of their retirement money in tax-deferred accounts, 25% in taxable accounts, and 25% in Roth accounts.
Pros:
- More predictable tax bill throughout retirement
- Can prevent a big tax bubble by taking money from tax-deferred accounts before age 73.
- Keeps tax bill more manageable for retiree.
- Hedging your bets on changing tax laws throughout retirement.
Cons:
- May take a little more calculation in the first years of retirement to get started.
- Could result in taxable income to heirs if the IRAs are still a large portion of estate at retirees’ death.
- May not be the “best” for tax planning, but who really knows that anyway?
I have to admit, this is my favorite method. Especially for those who want to leave money behind for heirs, but don’t want to bear all the tax brunt themselves.
Mostly I like this because of ever changing tax and estate laws. We really can only guess at the best withdrawal method at the beginning of a 30-year retirement. The estate rules and tax brackets will change over time (See SECURE Acts), so by tapping into all assets all the time, you are sure to hit the “best” way for at least part of payout plan.
I also like the idea of taking Roth IRA money out during retirement. You earned it, you should enjoy the tax-free benefit! Roth money seems like it could be good for tax management and also good to think of as fun money. Hey, we saved 25% on that vacation by taking the money out of a tax-free account!
Next week, I’ll provide a wrap-up of how to apply these ideas to creating your retirement paycheck.
