Which Retirement Account Should I Withdraw From First?

Retirement planning involves making crucial decisions to ensure financial security during your golden years. One of the most important decisions is determining the order in which you withdraw funds from your retirement accounts. This decision can significantly impact your tax liability and the longevity of your savings. This article will provide a comprehensive guide to help you understand the optimal withdrawal strategy for your retirement accounts, maximizing your financial well-being.

Understanding Retirement Account Types

Before discussing withdrawal strategies, it’s essential to understand the different types of retirement accounts available:

  • Traditional IRA: Contributions are made pre-tax, reducing your current taxable income. Withdrawals in retirement are taxed as ordinary income.
  • Roth IRA: Contributions are made after-tax, meaning you don’t receive an upfront tax deduction. However, qualified withdrawals in retirement are tax-free.
  • 401(k): Employer-sponsored retirement plan that allows pre-tax contributions. Withdrawals in retirement are taxed as ordinary income.
  • 403(b): Similar to a 401(k) but available to employees of public schools and certain non-profit organizations.
  • Taxable Accounts: Non-retirement investment accounts where contributions and earnings are taxed as ordinary income.

Optimal Withdrawal Strategy

The following steps outline an optimal withdrawal strategy to minimize taxes and maximize the longevity of your retirement savings:

1. Cash and Cash Equivalents:

  • Begin by withdrawing from cash and cash equivalents, such as savings accounts or money market accounts.
  • This strategy minimizes the impact on your tax-advantaged accounts and allows your investments to continue growing tax-deferred.

2. Taxable Accounts:

  • Once cash reserves are depleted, withdraw from taxable investment accounts.
  • Withdrawals from taxable accounts are taxed at long-term capital gains rates if held for more than a year, which are typically lower than ordinary income tax rates.

3. Social Security:

  • Consider delaying Social Security benefits as long as possible, as you will receive higher monthly payments for each year you delay claiming.
  • This strategy allows your other retirement savings to continue growing and reduces the tax burden on your Social Security benefits.

4. Pre-Tax Retirement Accounts (Traditional IRA, 401(k), etc.):

  • Withdraw from pre-tax retirement accounts only when necessary, as withdrawals are taxed as ordinary income.
  • Required Minimum Distributions (RMDs) must be taken from these accounts starting at age 73.

5. Roth Accounts (Roth IRA, Roth 401(k)):

  • Withdraw from Roth accounts last, as qualified withdrawals are tax-free.
  • Roth accounts offer tax-free growth and tax-free withdrawals, making them an ideal source of retirement income.

Additional Considerations

  • Tax Bracket: Consider your current and future tax bracket when making withdrawal decisions. Withdrawing funds when you are in a lower tax bracket can minimize your tax liability.
  • Investment Performance: Monitor the performance of your investments and adjust your withdrawal strategy accordingly. If your investments are performing well, you may be able to withdraw more aggressively.
  • Health and Life Expectancy: Consider your health and life expectancy when planning withdrawals. If you have a shorter life expectancy, you may need to withdraw more aggressively to ensure you don’t outlive your savings.

Withdrawing funds from retirement accounts is a crucial aspect of retirement planning. By following the optimal withdrawal strategy outlined above, you can minimize taxes, maximize the longevity of your savings, and ensure a secure financial future. Remember to consider your individual circumstances, such as tax bracket, investment performance, and life expectancy, when making withdrawal decisions.

Which accounts should you withdraw funds from first in retirement?


Which accounts should you draw down first in retirement?

Traditionally, tax professionals suggest withdrawing first from taxable accounts, then tax-deferred accounts, and finally Roth accounts where withdrawals are tax free. The goal is to allow tax-deferred assets the opportunity to grow over more time.

Is it better to withdraw from 401K or IRA first?

Traditional IRA And 401(k) From a tax perspective, it doesn’t matter which you start with. Keep in mind that once you turn 70½ years old, you’ll be required to take minimum distributions (RMDs) from both accounts.

Is it better to withdraw early from a Roth or traditional IRA?

Overall, the rules around withdrawing early from an IRA are more lenient with Roth IRAs than with traditional IRAs. Traditional IRAs: If you withdraw funds from your traditional IRA before age 59 and a half, you are taxed at your current income tax rate and you are charged a 10% early withdrawal penalty fee.

How much money should I withdraw from my retirement account?

As a starting point, Fidelity suggests you consider withdrawing no more than 4% to 5% from your savings in the first year of retirement, and then increase that first year’s dollar amount annually by the inflation rate. But from which accounts should you be taking that money? Sign up for Fidelity Viewpoints weekly email for our latest insights.

Which accounts should you withdraw from first?

First, let’s start with from which accounts should you withdraw from first. The general rule is that you withdraw the funds in this order: After-tax assets (savings, money market, and brokerage accounts) Tax-deferred assets (Traditional IRA and per-tax 401 (k)/403 (b)) Overall, the reasoning is pretty simple.

How do I withdraw money from my 401(k)?

The general rule is that you withdraw the funds in this order: After-tax assets (savings, money market, and brokerage accounts) Tax-deferred assets (Traditional IRA and per-tax 401 (k)/403 (b)) Overall, the reasoning is pretty simple. Withdraw the least tax-efficient accounts first and the most tax-efficient accounts last.

What happens if you withdraw money from a 401(k) during retirement?

When you eventually withdraw the money from your account during retirement, you’ll pay your ordinary income tax rate on your initial investment and any interest earned. Roth accounts, either IRAs or 401 (k)s, work the opposite way.

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