Order of Liquidation from Accounts and Its Importance for Retirees
As retirees navigate their golden years, understanding the order of liquidation from various accounts is crucial for effective financial management. The order in which you withdraw funds from your accounts—whether they be taxable, tax-deferred, or tax-free—can significantly impact your overall tax liability, cash flow, and financial sustainability during retirement.
1 - Taxable Accounts First
These are typically brokerage or non-retirement investment accounts. Withdrawals from these accounts are subject to capital gains tax. By using taxable funds first, you allow tax-advantaged accounts to continue growing without immediate tax implications, thereby maximizing their long-term potential.
2 - Tax-Deferred Accounts Next
Examples of these types of accounts include 401k’s. IRAs, and SEP IRAs. Withdrawals from these accounts are taxed as ordinary income, which means pulling money from these sources can increase your taxable income for the year. Strategic withdrawals can help you avoid jumping into a higher tax bracket, allowing for a more controlled tax situation.
3 - Tax-Free Accounts Last
Lastly, consider withdrawing from tax-free accounts, such as Roth IRAs. Qualified distributions from Roth IRAs are tax-free and do not impact your taxable income. By reserving these funds until later in retirement, you can preserve their tax-free growth potential, which can be particularly beneficial if you anticipate needing funds later on or wish to leave a tax-free inheritance.
4 - Consider Required Minimum Distributions (RMDs)
It's essential to keep in mind that once you reach age 73, you're required to start taking withdrawals from tax-deferred accounts, known as RMDs. Failing to meet these requirements can result in hefty penalties. Therefore, planning for RMDs is a critical component of your withdrawal strategy.5 - Peace of Mind
5 - Consulting a Financial Advisor
Given the complexities involved in liquidation strategies, working with a financial advisor can provide valuable insights tailored to your individual circumstances. They can help you devise a plan that aligns with your retirement goals while minimizing tax implications.
In conclusion, the order of liquidation from your accounts can play a pivotal role in ensuring a financially secure retirement. By understanding the tax implications and strategically planning your withdrawals, you can optimize your cash flow and maintain the longevity of your retirement savings. This typically looks different from situation to situation, so be sure to have this discussion with your financial advisor to determine the best course of action for you.
This is being provided for informational purposes only and should not be construed as a recommendation to buy or sell any specific securities. Past performance is no guarantee of future results, and all investing involves risk. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. The views expressed are those of Jeff Martin and do not necessarily reflect the views of Mutual Advisors, LLC, or any of its affiliates. Investment advisory services offered through Mutual Advisors, LLC, DBA Silver State Wealth Management, an SEC registered investment adviser.
