Smart Asset’s article entitled “The Worst Way to Withdraw From Your Retirement Accounts” reminds us that investing comes with risk, and no situation is the same. At Beck & Lenox Estate Planning & Elder Law, LLC, our attorneys regularly review advice on how NOT to make retirement account withdrawals. Let’s look at the impact of withdrawing from your retirement accounts in the wrong order.
- Not Beginning with Your Investment Income. Withdrawing from your investments first gives your retirement accounts more time to accrue interest. If you start with your 401(k) or IRA, you could forfeit several years worth of income in retirement savings. Whether you have mutual funds, a brokerage account, ETFs, stocks or bonds, they are taxable. Therefore, you will have to pay capital gains taxes on withdrawals. Some investments also require you to pay taxes on distributions each year, like some mutual funds.
- Claiming Social Security Benefits at 62. If you want your maximum Social Security benefits, you will need to keep working until your “full retirement” age. Benefits at age 62, 66, or 67 are not your maximum benefits. The maximum starts at age 70. If you claim before, you are not getting your full benefits. Every year after full retirement, your payout increases by a certain percentage based on specific criteria. To maximize on this strategy, wait until you are 70 when your payments will be the highest. They increase by 8% each year you wait. This strategy will help you collect the highest Social Security benefit, but everyone’s circumstances are not identical.
- Withdrawing from Your 401(k) and IRA Before RMDs Start. You can begin to take cash from your 401(k), when you turn 59½. However, that does not mean it is a good idea. The law does not make you start taking Required Minimum Distributions until you turn 72. You can use this time for your money to keep growing with compound interest.
- Using Your Roth IRA Funds Prior to Exhausting Other Options. Delay withdrawing money from your Roth IRA as long as you can because you paid taxes up front. Therefore, you can take money out of your Roth IRA and it will not count as taxable income. Your Roth IRA also will keep growing tax-free while you use your other savings. This is because a Roth IRA holds after-tax funds and the IRS does not need to tax it again, you also do not need to take Required Minimum Distributions. This account can keep growing for as long as you want.
- The Smartest Way to Plan Your Withdrawals. Determining the best sequence to withdraw money from your retirement accounts is different for everyone, so speak with an experienced financial advisor who specializes in working with retirees and pre-retirees. Beck & Lenox is happy to work with your financial advisor, or recommend one, that can help you know how not to make retirement account withdrawals.
Reference: Smart Asset (July 20, 2021) “The Worst Way to Withdraw From Your Retirement Accounts”