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I’m ready to retire.  Which account should I take money from first?  Thumbnail

I’m ready to retire. Which account should I take money from first?

You’ve made it.  After decades of hard work, the day will soon be here.

Depending on at what age you actually retire, can dictate where it might be best to withdraw funds needed throughout retirement.   Let’s look at some rules.

Generally speaking, the following types of accounts have the following rules:

  1. Traditional IRA’s.  Money generally is contributed, and one receives a tax deduction. Therefore, when money is taken out, it is added to one’s ordinary income.  If one made a non-deductible contribution, and filed the proper form with their taxes, only the growth would be taxable. All plans are subject to the Required Minimum Distribution age rule as follows:

If born 6/30/1949 or earlier, distributions must begin at 70 ½

If born 7/1/1949 or to 1950, distributions must begin at 72

If born 1951 to 1959, distributions must begin at 73

If born 1960 or later, distributions must begin at 75

  1. Roth IRA’s.  If this is your own Roth IRA (not inherited from a non-spouse) and the account has been opened and funded for at least five years and you are over 59 ½, any withdrawal should be tax free.  If these two conditions are not met, then the principal can be tax free if withdrawn at any age, however, the earnings are subject to taxation and possible penalties if under 59 1/2.
  2. 401K, 403b’s, etc.  These can have similar rules to a deductible IRA however, one key difference is, in most cases if you are over your Required Minimum Distribution (RMD) age, and still working at the company, no RMD is required. Once you leave that job, the RMD rules apply.

Non-retirement accounts such as a brokerage account.   These accounts have no required distributions and are taxed differently and usually more favorably than a non Roth IRA retirement account.

Why is that?  Well, with a brokerage account, you can be subject to capital gains taxes which are generally lower than ordinary income tax rates.  Nonqualified dividends can carry higher tax rates.

So, which accounts should I take money from?

It seems the Roth IRA and the brokerage account are a better way to go tax wise.  Am I missing something?

This is a logical way to think about it. Let’s look at an example:

Let’s say you are married, and you and your spouse need about $85,000 to meet basic living expenses in the first year you are retired.

You have pretax income from Social Security of $69,000

You are both under the RMD age requirement.   (Bear in mind, if you are over 59 ½, you can always take money out of your IRA or 401k without penalty however, you will be subject to ordinary income taxes.)

So, in this example, they are short by $16,000 ($85,000 - $69,000 = $16,000).  I didn’t factor in taxes as I want to keep it simple, and taxes just complicates everything.

Should they take the $16,000 from their IRA, Roth, or brokerage account?

Well, it depends.  If they have a lot of money in their brokerage account, and the investments are paying dividends, these dividends are taxed whether you take them out of your account or not.  If they add up to $16,000, it may be best to take the income from this account since you are being taxed on it anyway.

If they don’t have a lot of dividends in this type of account, there might be opportunities to sell off investments with no tax implications.

Having a good size emergency/cash account can be a great idea as it also gives one the option to pull cash from there if needed.

Sometimes folks are fortunate that their Social Security, (and pension if lucky to have one) along with RMD’s, are enough to fund their basic living expenses.

For those not so fortunate, one should look more closely at the ramifications of taking money from a particular account.

Once in retirement and (or close to being) on Medicare, one should also be mindful of IRMAA. 

IRMAA or Income Related Medicare Adjustment Amount, affects one’s premiums for Medicare. Medicare premiums can rise when one’s income goes above a certain level.

One’s income can go up from working but also from investments.  That’s why it is a good idea to be mindful of all of these areas.

Read more about IRMAA in this blog,  Why Did My Medicare Premiums go Up?

Have questions or something I may be able to help you figure out, schedule a quick complimentary call with me by clicking HERE to see my online calendar

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All the best.

Rick Fingerman, CFP®, CDFA™, CCPS®



Financial Planning Solutions, LLC (FPS) provides this blog for informational and educational purposes only. Nothing in this blog should be considered investment, tax, medical, or legal advice. FPS only renders personalized advice to each client. Information herein includes opinions and source information that is believed to be reliable. However, such information may not be independently verified by FPS.  Please see important disclosures link at the bottom of this page.

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