When it comes to withdrawing money from retirement, determining the order in which you withdraw from your various accounts is an important consideration. The order in which you withdraw from your accounts can have a big impact on the lifespan of your savings, the amount of taxes you pay, and even your Social Security benefits. While the traditional withdrawal order has its advantages, a different approach may be useful depending on your goals.
In this article, we’ll explain the traditional withdrawal procedure, discuss alternative strategies, and highlight what each method aims to accomplish.
Conventional retreat orders
A traditional retirement withdrawal strategy is a simple approach that typically follows this sequence:
- Taxable Account (Example: savings and brokerage accounts): The reason to withdraw from these accounts first is that long-term capital gains are often taxed at a lower rate than ordinary income, allowing the account to continue to grow tax-deferred.
- Tax-deferred accounts (e.g. 401(k), traditional IRA): Withdrawals from these accounts are subject to ordinary income tax, and you must begin taking required minimum distributions (RMDs) after age 73 depending on your date of birth.
- Tax-exempt accounts (Example: Roth IRA): Roth IRAs are often left last because withdrawals from these accounts are tax-free if you follow the rules. Roth IRAs have no required required minimum distributions (RMDs), so they can grow indefinitely.
advantage: The traditional withdrawal procedure for retirement savings is widely recommended because it is designed to maximize tax efficiency and extend the life of your retirement savings. Here are some key reasons to consider the traditional withdrawal procedure:
- Maximize tax-deferred growth
- Take advantage of low capital gains tax rates
- Maintain a tax-exempt account
- Smooth out the tax impact over time
- Consider your estate planning – if you plan to leave a legacy – it may make sense to leave tax-deferred assets to your heirs
- Maximize your after-tax cash flow and increase the amount of money you can spend
Proportional approach drawer
a Mixed or Proportional Withdrawal Strategy They will withdraw money from both taxable and tax-advantaged accounts in roughly equal proportions, and carefully balancing withdrawals can help retirees manage their tax brackets more efficiently.
advantage:
- Tax rate classification managementBy withdrawing from both taxable and tax-deferred accounts, you can potentially manage your taxable income and avoid landing in a higher tax bracket.
- Smoother tax impact: This method spreads the tax burden more evenly over time, instead of incurring a large tax bill later in life through RMDs.
- Cutting shadow taxes: Depending on your situation and circumstances, a proportional approach may allow you to avoid increasing the taxable amount of your Social Security benefits or incurring the IRMAA surcharge on your Medicare premiums.
The opposite of the traditional revocation order
The reverse of the traditional retirement allowance withdrawal order is: Tax-exempt accounts (Like a Roth IRA) First, Second Tax-deferred accounts (such as traditional IRAs and 401(k)s), and finally Taxable AccountThis strategy is less commonly used but can offer certain benefits depending on your personal goals and tax situation.
advantage: Reversing the traditional withdrawal order — starting with a Roth IRA, then tax-deferred accounts, and finally taxable accounts — can provide tax benefits, especially in the first few years of retirement. This allows retirees to keep their taxable income low, manage their taxes effectively, and delay RMDs, potentially reducing their overall tax burden. However, it also reduces the long-term growth of tax-exempt assets, which could result in larger RMDs for retirees in the future if not managed carefully.
This strategy is especially useful for those who prioritize: Early tax savings after retirement And I want to Maximize your flexibility It can help you manage your taxable income, and it can also be advantageous for early retirees who want to take full advantage of the premium tax credits on ACA health care plans.
How do I choose the withdrawal instructions I will use when I retire?
The answer to this question depends entirely on your goals. With Boldin Planner, you can compare a traditional drawer order to a custom order of your choosing.
- First, go to “My Plan” > “Money Flow.”
- Go to the Withdrawal Order section and select the Edit button.
- Select the Customization tab
- Reorder your accounts and click Save
- You can quickly see when your savings will end, what their inheritance value will be, and how taxes will change over your lifetime, plus see graphs broken down by withdrawal type and account.
- You can switch back to the traditional account order at any time.
Note: You can try this feature by copying a version of the baseline plan into your new scenario, but you can always revert to the legacy account order.
