When was the last time you went to the doctor feeling like you were on your deathbed and were told, “Hydrate, get lots of rest and, for goodness’ sake, wash those hands!” The personal finance equivalents tend to go like this: “Save 15% of your pay. Have an emergency fund. Don’t get into credit card debt.” None of this common knowledge applies to actually getting your money out of your retirement accounts. This article is about that.
In the next few paragraphs, I’m going to outline a standard withdrawal order for which of your accounts to withdraw from and when. There are very notable exceptions to these rules that should not be overlooked.
1. Cash.
Cash is the first place you should go for income in retirement, assuming you already have an emergency fund equal to six months of expenses. For example, if you have monthly expenses of $10,000 and have $100,000 in the bank, your first $40,000 of income should come from cash or cash equivalents.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
There are two main reasons for this: growth and taxes. Over long periods, cash will grow more slowly than almost anything else. You want your fast growers, which are typically your riskiest investments, to have time to grow. Tapping cash first allows that.
Drawing from cash will also keep your taxes low in your early years of retirement. This will allow you to move money from a traditional IRA, or any pre-tax account, into a Roth IRA at a potentially lower rate than what you would pay in the future.
2. Taxable accounts.
Once you have withdrawn down to your emergency fund, you’ll want to tap your taxable investments. These include individual, joint and revocable trust accounts.
Like the cash example above, this is based largely on taxes. Withdrawals are likely to be taxed at more favorable long-term capital gains rates if held for more than a year. Additionally, these accounts are not tax-deferred, meaning all else being equal, they will grow more slowly than a retirement account.
3. Social Security.
Now things start to get tricky. I am not suggesting that once you tap out your taxable accounts, you should automatically turn on Social Security. There are breakeven points based on life expectancy, as well as tax and legacy considerations.
Social Security retirement benefits are available as early as age 62 and max out at 70. The Social Security Administration pays you handsomely for every month you wait to claim. Therefore, if the goal is to maximize income, typically the longer you wait, the better.
4. Pre-tax retirement accounts.
This includes traditional IRAs, 401(k)s, 403(b)s, 457s, SEP IRAs, etc. Basically, all the accounts you have yet to pay income taxes on. The accounts are tax-deferred and will be taxed as income upon withdrawal. So, often the longer you can wait, the better. However, the IRS will eventually come to collect. The table below outlines the latest age you can wait to start taking required minimum distributions (RMDs).
| Date of birth | Age for first RMD |
|---|---|
| 6/30/49 or earlier | 70½ |
| 7/1/49-12/31/50 | 72 |
| 1951-1959 | 73 |
| 1960 or later | 75 |
5. Roth accounts.
Roth accounts grow tax-free, and qualified withdrawals come out tax-free. Outside of a health savings account, this is likely your most tax-efficient savings vehicle. Continuing with the theme above, you want the vehicles that grow most efficiently to have the longest time to accumulate. Beyond that, Roth IRAs under the SECURE Act have become incredibly effective legacy transfer tools. Not only are the disbursements tax-free for beneficiaries, but withdrawals can typically be deferred for 10 years beyond your death.
Not to be confused with the SECURE Act above, the SECURE 2.0 Act eliminated the pesky minimum distribution rules (see table above) for all Roth accounts. Therefore, you can theoretically never withdraw from these accounts and let your kids enjoy your smart tax planning. But, where’s the fun in that?
-
United Airlines Raises the Bar with New Business Class SuitesDiscover how United's new Polaris Studio suites redefine luxury and comfort on long-haul flights.
-
Walmart Raising Prices Soon — Here’s Which Products Will Cost You More This SummerIf you heard about Walmart raising prices, here are the key details you need to know ahead of your next shopping trip.
-
Such Attractive Yields in High-Grade Munis Are Rare and May Not Last LongAccording to this munis expert, the last time munis were this cheap was a brief period in 2023. If you kicked yourself for missing out then, you have a second chance now.
-
Financial Analyst Sees a Bright Present for Municipal Bond InvestorsHigh-tax-bracket investors have an excellent opportunity to secure low-volatility, high-quality returns at yield levels rarely seen in over a decade.
-
I'm an Insurance Pro: How Not to Get Dumped by Your Insurance AgentYour insurance agent or broker might show you the door if you do any of these five things. Being a good customer is about more than paying your bill on time.
-
Two Estate Planning Issues You Should Never OverlookThis estate planning attorney explains why proper asset titling and beneficiary designations make a big difference when it's time to transfer your wealth.
-
The Four D's That Could Force You to Sell Your BusinessBusiness owners (or their heirs) can be rushed into a sale of their company if they haven't planned for a major change in circumstances — or the four D's.
-
The Three Retirement Tax Issues I Nag My Clients AboutA financial professional highlights areas of tax planning that retirees should have on their radar as they finalize their retirement plan.
-
Do You Need Disability Insurance? Three Things to KnowDisability insurance can help replace some of your income during unexpected life events. Here are the basics, courtesy of a financial professional.
-
How to Turn Education Planning Into Retirement PlanningNervous about investing in a 529 plan? If college doesn't pan out, the money can now be rolled over into a Roth IRA, which will grow tax-free until retirement.
