Retirement planning can be complex, especially when it comes to deciding the order in which you withdraw from your different accounts. The sequence in which you tap into your savings can have a significant impact on your tax liabilities, the longevity of your retirement funds, and even your Social Security benefits. While the traditional withdrawal order is commonly followed, alternative strategies can be equally beneficial depending on your financial goals and circumstances.
The Traditional Withdrawal Order
The traditional retirement withdrawal strategy typically follows this sequence:
- Taxable Accounts (e.g., savings and brokerage accounts): Withdrawals from these accounts are prioritized first because long-term capital gains are often taxed at a lower rate than ordinary income, allowing tax-deferred accounts to continue growing.
- Tax-Deferred Accounts (e.g., 401(k)s, traditional IRAs): These accounts are tapped into next, as withdrawals are subject to ordinary income tax and RMDs must begin at a certain age.
- Tax-Free Accounts (e.g., Roth IRAs): Roth IRAs are usually saved for last since withdrawals are tax-free, provided all regulations are followed, with no RMDs required, allowing funds to grow indefinitely.
The benefits of following a traditional withdrawal order include maximizing tax efficiency, extending the life of your retirement savings, and preserving your after-tax cash flow. This method has been widely recommended due to its tax benefits and the potential to increase your spendable money.
A Proportional Approach to Withdrawals
A blended or proportional withdrawal strategy involves withdrawing funds from both taxable and tax-advantaged accounts in proportion to each other. This method can help manage your tax bracket more effectively and reduce the overall tax impact over time.
Benefits of a proportional approach include better tax bracket management, smoother tax impact distribution, and avoiding additional taxes like Social Security benefit taxes or Medicare surcharges.
The Reverse of a Traditional Withdrawal Order
Contrary to the traditional approach, the reverse withdrawal order starts with tax-free accounts, then tax-deferred accounts, and lastly taxable accounts. This method can offer specific tax benefits, especially in the early years of retirement, helping to keep taxable income low and delay RMDs.
While less commonly used, the reverse of the traditional withdrawal order can be advantageous for early retirees seeking to maximize tax benefits and flexibility in managing their taxable income.
How to Choose What Withdrawal Order to Use for Retirement?
The choice of withdrawal order depends on your financial goals. By using the Boldin Planner, you can compare different withdrawal orders to determine which one suits your objectives best.
- Go to My Plan > Money Flows
- Navigate to Withdrawal Order and select the edit button
- Choose the Customized tab
- Rearrange your accounts and hit "Save"
- View changes to your plan, including out-of-savings age, estate value, lifetime taxes, and withdrawal charts
Play around with different scenarios to find the optimal withdrawal order that aligns with your retirement goals and financial needs. Remember, you can always switch back to the traditional account order if needed.
