Developing a withdrawal strategy for your accounts is an important step in preparing for retirement. The order in which you access your funds can significantly impact your tax liability, the longevity of your portfolio, and your ability to meet long-term goals.
Taxable Brokerage and Savings Accounts
Withdrawals from taxable accounts are typically taxed at lower capital gains rates rather than higher ordinary income tax rates, making this the most tax-efficient option early on. Additionally, drawing from these accounts first allows your tax-advantaged accounts to continue growing. To further reduce your tax burden, consider harvesting losses strategically to offset gains.
TSP, Traditional IRA, and 401(k)
These accounts are tax-deferred, meaning taxes on contributions and growth have not yet been paid. While these accounts are excellent for long-term growth, required minimum distributions (RMDs) begin at age 73 (or 75 for those born in 1960 or later). These mandatory withdrawals can’t be avoided and missing them results in steep penalties. Delaying withdrawals from these accounts as long as possible maximizes their tax-deferred growth, compounding their benefits over time.
Roth IRA and Roth 401(k)
These accounts are funded with after-tax dollars, and qualified withdrawals are entirely tax-free, making them highly advantageous later in retirement. Unlike traditional IRAs, Roth IRAs are not subject to RMDs, allowing them to grow tax-free indefinitely. This feature makes them ideal for legacy planning or for covering late-in-life expenses. Preserving Roth accounts also serves as a hedge against potential future tax increases.
Social Security
The timing of your claim can significantly influence your retirement income. Delaying Social Security benefits until age 70 increases your monthly payment by 8% annually after you reach full retirement age. By relying on other accounts to cover expenses while postponing Social Security, you can secure a higher guaranteed income later in life, helping to offset longevity risk.
Strategic Withdrawals
Balancing withdrawals from different accounts manages taxes and cash flow effectively. For instance, withdrawing just enough from tax-deferred accounts to stay within a lower tax bracket can minimize your tax bill. If you find yourself in a low-income year, consider converting some funds from a traditional IRA or 401(k) into a Roth IRA. This move reduces future RMDs and provides a source of tax-free income later.
Ultimately, the best withdrawal strategy depends on your unique goals, health, tax situation, and income needs. A well-thought-out plan can help you reduce taxes, extend your savings, and provide peace of mind. Reach out to an FRC® trained advisor to tailor your custom strategy.
