Crafting a withdrawal plan for your retirement accounts is a critical step in securing your financial future. The sequence in which you tap into your funds can greatly influence your tax obligations, portfolio longevity, and ability to achieve long-term objectives.
Taxable Accounts: Brokerage and Savings
Taxable accounts often offer the most tax-efficient withdrawal option early in retirement. Since these withdrawals are typically subject to lower capital gains tax rates instead of higher ordinary income tax rates, they can help minimize your overall tax burden. By drawing from these accounts first, you allow your tax-advantaged accounts to continue compounding. To further enhance tax efficiency, consider harvesting losses to offset any realized gains.
Tax-Deferred Accounts: TSP, Traditional IRA, and 401(k)
Tax-deferred accounts, such as a Thrift Savings Plan (TSP), traditional IRA, or 401(k), allow contributions and growth to remain untaxed until withdrawn. Required minimum distributions (RMDs) begin at age 73, or age 75 for those born in 1960 or later, and carry substantial penalties if missed. To maximize the benefits of tax-deferred growth, it’s wise to delay withdrawals from these accounts for as long as possible, provided it aligns with your overall financial strategy.
Tax-Free Accounts: Roth TSP and Roth 401(k)
Roth accounts, funded with after-tax contributions, offer the advantage of tax-free qualified withdrawals. Unlike traditional IRAs, Roth IRAs are exempt from RMDs, enabling tax-free growth indefinitely. These features make Roth accounts an excellent tool for estate planning or covering expenses later in life. Keeping Roth funds intact can also provide a safeguard against potential future tax increases.
Social Security
The timing of your Social Security benefits plays a pivotal role in shaping your retirement income. Delaying benefits until age 70 can boost your monthly payment by 8% annually after reaching full retirement age. Using other accounts to cover expenses while deferring Social Security helps ensure a higher guaranteed income later, reducing the risk of outliving your savings.
Coordinated Withdrawal Strategies
A balanced approach to withdrawals can optimize tax outcomes and maintain steady cash flow. For example, withdrawing just enough from tax-deferred accounts to stay within a lower tax bracket can minimize your tax liability. Additionally, during years with lower income, consider converting funds from a traditional IRA or 401(k) to a Roth IRA. This conversion reduces future RMDs while creating a source of tax-free income for later use.
Tailoring Your Strategy
Your optimal withdrawal strategy will depend on your individual goals, health, tax considerations, and income requirements. A thoughtful approach can help reduce taxes, preserve your savings, and offer peace of mind. Connect with an FRC® certified advisor to create a personalized withdrawal plan that aligns with your unique needs.
