For diligent savers, managing a diverse array of retirement accounts is key: from tax-deferred options like traditional IRAs or 401(k)s, to tax-free vehicles such as Roth IRAs or Roth 401(k)s, and perhaps even taxable brokerage accounts. The government incentivizes keeping funds in retirement accounts by imposing penalties on early withdrawals, typically before age 59½.
When it’s time to start drawing from your accounts in retirement, it’s crucial to strategize wisely, balancing tax considerations with your financial needs. Here’s a breakdown:
Tax-Deferred Accounts: These accounts, like traditional 401(k)s or IRAs, are funded with pre-tax dollars. Withdrawals are taxed as ordinary income, and you’re required to take minimum distributions starting at age 70½. This can create a cycle of withdrawals to cover taxes, potentially impacting your retirement income.
Tax-Free Accounts: Roth IRAs and Roth 401(k)s are funded with after-tax dollars, allowing tax-free growth and withdrawals, provided certain conditions are met. Roth IRAs have no required minimum distributions, making them attractive for building tax-free income for yourself or heirs.
Taxable Accounts: Regular brokerage accounts can supplement retirement savings but come with tax implications. Long-term capital gains tax applies to investments held over a year, while short-term gains are taxed at ordinary income rates. Losses may be deductible.
Strategic Withdrawal: Between ages 59½ and 70½, when withdrawals are penalty-free but not required, consider drawing from tax-deferred accounts strategically. With lower income, you can manage taxes more efficiently, possibly converting funds to a Roth IRA for tax-free growth.
It’s important to note the rules governing contributions and conversions, particularly regarding Roth IRAs. While spending retirement savings requires careful planning, understanding the tax dynamics of your accounts can help tailor a strategy to your needs.
