Withdrawing from your accounts in retirement
When it comes to withdrawing funds from retirement accounts, the order in which you liquidate these accounts can significantly impact your retirement plan and tax liability. Understanding this process is essential for effective retirement planning. Retirement accounts like 401(k)s, Traditional IRAs, and Roth IRAs are taxed differently, which plays a crucial role in determining the order of withdrawals. Generally, one of the most common strategies is to withdraw from taxable accounts first, then tax-deferred accounts, and finally tax-free accounts. However, this will not be the case for everyone and their specific plan, it is important you work with your financial advisor and tax planner to make sure the strategy you are using is what benefits your specific situation the most. For a general plan, it may look something like this:
Taxable Accounts First: If you have investment accounts that are subject to capital gains tax, consider liquidating these first. This step allows your tax-advantaged accounts to continue growing, providing a more robust financial cushion for the future. Additionally, withdrawing from taxable accounts can help you manage your taxable income effectively.
Tax-Deferred Accounts Next: After utilizing your taxable accounts, focus on tax-deferred accounts like Traditional IRAs and 401(k)s. Withdrawals from these accounts are taxed as ordinary income, which means they will increase your taxable income for the year. Therefore, it’s advisable to carefully plan your distributions to avoid pushing yourself into a higher tax bracket.
Tax-Free Accounts Last: Roth IRAs are considered tax-free accounts since qualified withdrawals are not subject to income tax. By preserving these funds until the end, you can maximize the tax-free growth and potentially leave a tax-free inheritance for your beneficiaries.
Consider Required Minimum Distributions (RMDs): Once you reach the age of 72, you are required to begin taking distributions from tax-deferred accounts, which can affect your withdrawal strategy. Proper planning to meet RMDs can help you avoid hefty penalties while still following the order of liquidation.
Consult a Financial Advisor: Given the complexities involved, working with a financial advisor can be beneficial. They can help you tailor a withdrawal strategy that aligns with your long-term goals and minimizes tax implications.
In summary, the order of liquidation from retirement accounts is not just a matter of convenience; it’s a strategic decision that can have lasting financial effects. By understanding how different accounts are taxed and planning your withdrawals accordingly, you can create a retirement plan that is both tax efficient and that can help your overall bottom line.
The Role of Financial Advisors in Crafting a Withdrawal Strategy
Finally, it is important that you have a strategy in place prior to retiring that you can adhere to and that you understand both the risk and tax implications of said strategy. If this is something that you do not feel is in your wheelhouse, reaching out to find a financial advisor and tax planner who can help will be paramount. Retirement, just like life will throw you curveballs both financially and in everyday life, it will be important to have a plan in place to keep you on track and able to adjust and evolve to your ever-changing world.
This is being provided for informational purposes only. The views expressed are those of Silver State Wealth Management 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. Silver State Wealth Management, nor any of its members, are tax accountants and do not provide tax advice. For tax advice, you should consult your tax professional.