Crafting your retirement income strategy is like conducting a symphony – each investment plays a crucial role, and the order in which you draw from them can make or break the performance. As you stand at the threshold of retirement, the question looms: which instruments should you cue first, and which should you save for the grand finale?
The Art of Tax-Efficient Withdrawals
Your retirement accounts aren’t created equal in the eyes of the IRS. The order in which you tap into them can significantly impact your tax bill and, consequently, how long your savings last.
Traditional IRAs and 401(k)s: The Taxable Titans – These accounts have been growing tax-deferred, but Uncle Sam will want his share when you start withdrawing. Remember, these withdrawals are taxed as ordinary income. Drawing too much too soon could push you into a higher tax bracket, potentially increasing your Medicare premiums and subjecting more of your Social Security benefits to taxation. Likewise, waiting until age 73, when you must begin Require Minimum Distributions (RMDs), could cause tax issues later in life.
Roth Accounts: The Tax-Free Treasures – Roth IRAs and Roth 401(k)s offer tax-free withdrawals in retirement, provided you meet certain conditions. The beauty of Roth accounts lies in their flexibility – you’re not required to take distributions, allowing your money to grow tax-free for as long as you like.
Taxable Accounts: The Flexible Friends – These include your regular brokerage accounts. While you’ll owe taxes on dividends and capital gains, these accounts offer more flexibility and potentially lower tax rates compared to traditional retirement accounts.
The Conventional Wisdom: A Three-Act Play
Act 1: Start with taxable accounts. This allows your tax-advantaged accounts more time to grow.
Act 2: Move on to tax-deferred accounts like traditional IRAs and 401(k)s. You’ll have to start taking Required Minimum Distributions (RMDs) at age 73 anyway.
Act 3: Save Roth accounts for last. This gives them maximum time to grow tax-free and provides a tax-free income source later in retirement.
But is this one-size-fits-all approach always best? Not necessarily.
The Case for Flexibility: Rewriting the Script
Your retirement income strategy should be as unique as your fingerprint. Here’s why a more nuanced approach might serve you better:
- Tax Bracket Management – In lower-income years, it might make sense to draw more from your traditional IRA, filling up lower tax brackets. This could reduce your RMDs and potentially lower your lifetime tax bill.
- Roth Conversions – If you have years with unusually low income, consider converting some of your traditional IRA to a Roth. You’ll pay taxes now, but it could lead to significant tax savings down the road.
- Capital Gains Harvesting – In years when your income is low, you might be in the 0% long-term capital gains tax bracket. This could be an opportune time to sell appreciated assets in your taxable accounts. And, if you want to continue to own those investments, you can buy them right back with a higher tax basis.
- Legacy Planning – If you’re planning to leave an inheritance, Roth accounts can be particularly valuable. Your heirs will thank you for the tax-free withdrawals.
The Role of Guaranteed Income
Don’t overlook the importance of guaranteed income sources in your withdrawal strategy. Social Security, pensions, and annuities can provide a stable base, allowing you to be more flexible with your investment withdrawals.
Adjusting for Market Conditions
Your withdrawal strategy shouldn’t be set in stone. In years when the market is down, consider drawing more heavily from cash reserves or guaranteed income sources to give your equity investments time to recover.
The Impact of Health Care Costs
As you age, health care expenses are likely to increase. Having tax-free Roth withdrawals available can be particularly valuable for managing these costs without triggering additional taxes or Medicare surcharges.
Work With Us
Deciding which investments to draw from in retirement is a complex puzzle, one that can have significant implications for your financial well-being. At Brogan Financial, we specialize in helping our clients solve this puzzle in a way that maximizes their retirement income and minimizes their tax burden.
Our team of experienced advisors will work closely with you to create a personalized withdrawal strategy that considers all aspects of your financial picture. We’ll help you navigate the complexities of tax laws, market conditions, and changing personal circumstances to ensure your retirement income strategy remains optimal year after year.
Don’t leave your retirement income to chance. Contact Brogan Financial today to schedule a consultation. Let’s work together to orchestrate a retirement income strategy that harmonizes with your unique financial situation and goals. For weekly financial tips and insights, tune in to ‘More Living with Jim Brogan’ every Saturday morning at 9 only on 98.7 FM WOKI. Your path to a more confident and prosperous retirement begins here.
