A question that I am asked to address in many financial plans for pre-retirees is, “in what order should I take out my assets?” In other words, does it make sense to tap tax-deferred plans first or last? When should I start taking Roth money out? How about my taxable (non-retirement account) investments?
First, the bad news: To my knowledge, there is no one perfect way to do this. I don’t have a fancy software program that allows me to enter different types of accounts and it gives me a year by year plan for how much money to take out of each.
The answer, as with so much of financial planning, is that it depends. So, over the next few weeks, my blogs will focus on the 3 main ways to prioritize retirement withdrawals.
Method #1: Spend taxable (non-retirement) accounts first, tax-deferred (Traditional IRAs and Traditional company sponsored plans) second, Roth money last.
- Allows tax-preferred accounts (IRAs, Roth IRAs, 401(k)s, 403(b)s) to grow longer.
- If you never need to spend the Roth IRA money, that can be passed to heirs who can withdraw it income tax free.
- In the early years of retirement when you are likely spending more (more travel, hobbies, etc.), your tax rate can stay lower by spending assets that have mostly been taxed already.
- If you have large tax-deferred accounts and delay taking withdrawals, your Minimum Required Distributions starting at age 70 ½ could balloon, bumping you into a higher tax bracket.
- Your heirs may end up inheriting tax-deferred accounts that will add to their income tax bill as they are forced to withdraw that money during their working years.
- Your tax bills will vary wildly from one stage of retirement to the next as you spend down different pools of money. I find that most retirees like predictability in their expenses, especially taxes!
Stay tuned next week for Method #2!
If these topics sound like they would be of interest to your employees, sales conference, or professional organization, contact me at 303-324-0014 or kristi@