Last week, we talked about spending down retirement money starting with already-taxed assets, then tax-deferred accounts, and ending with Roth IRAs.
This week, we look at spend down Method #2: Tax-deferred (Traditional IRAs, 401(k)s) first, taxable (non-retirement) accounts second, Roth IRAs last.
- Spreads the taxes owed on tax-deferred accounts out over a longer period of time. This could result in lower year-to-year tax bills and possibly keep you in a lower tax bracket, depending on your total income.
- If there is any taxable money left over for heirs, they will get a step up in cost basis on the assets they inherit. Also, they are not forced to take that money out on some IRS mandated schedule.
- Roth IRA money must be taken out over heirs’ lifetimes, but the withdrawals are income tax free. Of course, there is talk of changing that preferred tax treatment for non-spouse heirs, so stay tuned for tax law changes. It may turn out to be more beneficial for retirees to spend Roth money than leave it for heirs.
- Larger tax bills in the early years of retirement when withdrawals tend to be higher to pay for fun stuff.
- You are paying taxes on your kids’ inheritance as well as supporting your own retirement needs.
Next week, withdrawal order #3! Fun stuff!
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@