When it is time to start withdrawing from your savings in retirement, deciding which account to access first can play an important role in maximizing your after-tax distributions over time and increasing the longevity of your overall portfolio in retirement.
While the optimal order of withdrawals from various account types can vary significantly based on each individual's unique situation and specific factors, generally, the following sequencing strategy can help reduce taxes in retirement:
First, if over the age of 70 ½ , be sure to meet the Required Minimum Distributions (RMDs) for your IRA and other retirement accounts where applicable. RMDs are an IRS requirement and fines for failing to satisfy RMDs can be steep . Keep in mind that if you have multiple traditional IRAs, you may aggregate RMD requirements across accounts and withdraw the total amount required from any one or multiple traditional IRA accounts you have. However this is not the case for 401Ks where RMDs must be taken from each particular account individually. Note that RMDs are calculated at the individual level and can not be passed between spouses.
Second, if you need additional income and have the choice of withdrawing from Taxable accounts, Roth accounts or IRA accounts, you would generally want to first draw down from Taxable accounts, then Roth accounts and then IRA accounts assuming similar asset allocation across all accounts.
There is a number of scenarios where you might choose a different withdrawal sequence strategy including, but limited to, the following:
- If you are planning to pass down assets to heirs, you may prefer to withdraw from a traditional IRA before a Roth IRA or Taxable account.
- If you expect your marginal tax rate to materially increase in the future, you might want to access traditional IRA assets sooner and delay drawing on Roth assets till later. The opposite might work better if you expect your marginal tax rate to be materially lower in the future.
- Depending on the makeup of assets in your Taxable account, if you potentially face significant tax consequence when making withdrawals, you may want to start drawing on traditional or Roth IRAs first.
The net effect of optimizing your account sequencing is potentially a more stable tax bill throughout retirement, lower lifetime taxes, higher lifetime after-tax income and increased longevity of the investment portfolio for customers.
Note: Everyone's particular tax circumstances are unique. Kindur is not a tax advisor and any information in these FAQs should not be considered tax advice and is provided for informational purposes only. Kindur does not actually calculate customer tax liabilities and