When planning your retirement withdrawals, understanding the order of account withdrawals is crucial. At Sullivan Financial Partners, we’ve guided many families through the Confident Retirement Journey, helping them navigate this common question: Which account should I withdraw from first?
Let’s dive into the strategy.
The “Junk Drawer” of Accounts
When families come to us for the first time, it’s not uncommon to see a stack of statements resembling a cluttered junk drawer. You might have IRAs, Roth IRAs, brokerage accounts, and other assets scattered across various institutions. Without a clear plan, it’s challenging to make the most of these accounts.
The key to successful retirement planning is understanding the purpose of each account and the optimal withdrawal sequence. Here’s how we approach it:
Step 1: Taxable Accounts
Start with taxable accounts, such as:
Non-qualified brokerage accounts
Regular individual or joint accounts
Bank accounts that aren’t tax-deferred
Why start here?
Liquidity: If you plan to retire before age 59½, these accounts allow penalty-free access to funds. This is essential since early withdrawals from tax-deferred accounts are generally subject to penalties.
Growth Preservation: Spending from taxable accounts first allows your tax-deferred and tax-free accounts (e.g., IRAs and Roth IRAs) to continue growing.
Step 2: Tax-Deferred Accounts
Next, move to your traditional IRAs, 401(k)s, and other qualified accounts. These accounts are tax-deferred, meaning you haven’t paid taxes on the contributions, and every dollar withdrawn will be taxable.
Why prioritize these next?
Required Minimum Distributions (RMDs): Once you reach age 73, RMDs are mandatory. Starting withdrawals earlier can help reduce the impact of RMDs later.
Legacy Considerations: Any money left in these accounts and passed to your loved ones is subject to income tax. Drawing down these accounts strategically can reduce the tax burden on your heirs.
Step 3: Tax-Free Accounts
Finally, turn to tax-free accounts such as:
Roth IRAs
Roth 401(k)s
Indexed universal life policies with cash value growth
Why wait?
Tax Flexibility: These accounts are ideal for supplementing income during periods of higher tax rates, helping you balance your overall tax liability.
Long-Term Growth: Delaying withdrawals allows these accounts to grow tax-free for as long as possible, maximizing their value.
Customizing Your Withdrawal Plan
While this order provides a general guideline, your plan may require adjustments. Combining withdrawals from different account types can create a more efficient strategy tailored to your unique needs and goals. For example, blending taxable and tax-deferred withdrawals might minimize your overall tax liability.
The Importance of a Plan
At the end of the day, having a plan is the most critical element. Understanding the reasoning behind your withdrawal strategy and tailoring it to your goals ensures financial confidence in retirement.
If you need help determining the right strategy for your retirement journey, we’re here to assist. Contact us at Sullivan Financial Partners, and let’s build your Confident Retirement Journey together.
Until then, think bigger and keep exploring the possibilities!