Withdrawing Funds in Retirement

June 03, 2019

Many of our Smart Money Management radio shows and our columns here in the Times Union are devoted to retirement planning.  Rightly so, considering that it is the most important financial planning task most people will face.  However, we devote most of the bandwidth to accumulating, saving and investing your retirement nest egg.  In reality, that is only half of the battle.  Today, we will discuss how to withdraw assets to fund your retirement. 

As most readers know, I am not a fan of the way the we fund retirement in this country.  I have used many radio shows and columns to discuss the change from defined benefit (pensions) to defined contribution retirement (401k) plans.  The burden of investment risk has shifted from employers to employees.  This does not just apply to the accumulation phase of retirement planning, however.  Defined benefit plans provide a guaranteed income for life, regardless of investment results.  Most retirees today are responsible for determining how much of their assets to spend each year, as task made more difficult by the current low level of interest rates. 

Most retirees will benefit from taking some time to plan which of their accounts to access, and in what order, to fund their retirement lifestyle.  Many retirees will have three distinct types of account to use.  The first and often largest are the tax deferred accounts such as 401k accounts, 403b accounts and IRAs. Second are tax-free accounts such as Roth IRAs and Roth 401ks.  Last is the fully taxable accounts like savings accounts or brokerage accounts or individual stocks and bonds.

The different rules for taxation of the three types of accounts is an important factor in determining your withdrawal plan.  Traditional 401k and IRA withdrawals are generally taxed as ordinary income if you are over 59 ½.  Roth withdrawals will usually be tax-free if you are over 59 ½ and have had the Roth for at least 5 years.  Income from your savings accounts, regular brokerage accounts, and individual stocks and bonds is taxed every year whether you take a distribution or not.  However, you may have to pay capital gains taxes on assets that you liquidate. 

If you are over 70 ½, you will be required to take a certain amount out of your IRA each year.  This is referred to as the Required Minimum Distribution or RMD.  This is required by the IRS so that they can begin to collect taxes on your tax-deferred retirement savings.  It is very important that you take this distribution each year.  The penalty for failing to do so is 50% of the amount you were required to take. (Source: IRS) Therefore, if you are required to take a distribution, this will be the first withdrawal you will make. 

Many investors choose to use their taxable savings, brokerage accounts and stocks and bonds next.  Because you have paid taxes on this money previously, often the only tax you will owe is on capital gains.  However, if you have investments that have suffered a capital loss, you can use that loss to offset any capital gains you take during the same tax year.  If you have more losses than gains, you can use the loss to offset up to $3,000 of ordinary income.  Unused losses can be carried forward to use in subsequent tax years. 

Some taxable investments like savings accounts and CDs can be liquidated with no tax cost all.  Others may have small capital gains.  To minimize your tax bill use these first.  Next, use investments with long term capital gains.  These are taxed at a lower rate than ordinary income, between 0% and 20%, depending on your bracket. (Source: IRS)

Roth IRAs do not have a required minimum distribution, so you can allow those investments to compound tax-free over your lifetime.  For this reason, many investors choose to use these funds last.  However, if you need additional income but you don’t want to add anything to your tax bill, these assets will allow you to accomplish that task.

Spending some time planning the spending part of your retirement plan can be time well-spent, because it may allow you to meet your cash needs with tax effiency. 

To hear the podcast of the Smart Money Management radio show on this topic, or others, go to our website at alderferbergen.com.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. 

Securities and Advisory services offered through LPL Financial, a registered investment advisor.  Member FINRA/SIPC.