After years of saving, you have finally made the difficult yet exciting choice of when to retire. While you are one step closer to the moment you’ve been waiting for, the tough decision making isn’t over. Now is the time to determine the best distribution strategy for withdrawing your money in retirement.
It’s important to realize there is no one-size-fits-all strategy for retirement distribution, but there are some important aspects to take into consideration when deciding the right one for you. Your distributions will vary greatly depending on the type of retirement account you hold.
Required Minimum Distributions (RMDs)
For traditional IRAs or employee-sponsored plans such as 401(k)s, there are required minimum distributions beginning when you reach age 70½. Required minimum distributions are taxed at your appropriate income tax rate. Roth 401(k)s also have RMDs, but just like Roth IRAs, the distributions are not taxable because you already paid tax on your initial contributions.
Another important item to consider is how you intend to use your money. Will you be using your retirement distributions to fund your daily lifestyle? Will they cover discretionary spending such as travel? Do you plan on reinvesting the money? These vital questions will help determine how and when you should take distributions.
There are many caveats to creating the most personalized and efficient distribution strategy for your portfolio. For example, if you plan to donate some of your retirement assets to a charity, you can set up a qualified charitable distribution up to $100,000 directly from your IRA, which will also meet your RMD for that year. Remember, you will likely be selling financial assets to receive the distributions, so it is best to leave your money invested for as long as possible.
For traditional accounts, taxes are another important variable to consider. There are many different tax-efficient strategies you can employ depending on which accounts you hold. A common strategy for people who hold both taxable investment accounts and retirement accounts is to exhaust all taxable accounts before touching retirement accounts. This is common because capital gains are taxed at 15%, which is generally much lower than the ordinary income tax rate you will pay on withdrawals from IRAs or 401(k)s. In some situations, this can be one of the most tax-efficient strategies, but it does leave your accounts vulnerable to future income tax raises by Congress.
These are just a few examples of the countless possibilities in retirement withdrawal strategies. To truly find your most appropriate strategy, it is important that you explore all the options that might apply to you. When you’re ready, I will be more than happy to help you identify your best withdrawal strategy.