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Retirement may seem far off, but when the time comes, it's important to plan your withdrawals carefully. Both taxes and timing are critical factors, and Forbes offers insight on the best withdrawal sequence to follow.
While your individual circumstances will influence how you withdraw your funds, Forbes contributor Larry Light outlines a general order in which most people access their retirement savings:
If you're over 70½, begin by withdrawing the required minimum distributions (RMDs) from your traditional IRA or 401(k). (Roth IRAs don’t require withdrawals until after the account holder’s death.) Your RMD is determined by your age, the year you turned 70½, and your account balance.
Start by using funds from any investment accounts that aren't part of a qualified retirement plan or tax-deferred annuity. By tapping these sources first, you can minimize your overall tax liability compared to withdrawals from retirement accounts or annuities. Note: If you’re younger than 70½, you should prioritize this step.
Begin by withdrawing funds from tax-deferred accounts such as variable or fixed annuities, as well as retirement plans like a traditional IRA or 401(k), where the gains are taxed as ordinary income.
Next, take withdrawals from tax-free accounts, including Roth IRAs and Roth 401(k)s. Since you contributed after-tax dollars to these accounts, you no longer owe any taxes to the IRS.
Larry Light emphasizes that while this approach is a solid starting point, it's essential to factor in other considerations: your expected spending, total tax obligations, potential income fluctuations, and more. Be sure to read his complete post at the link provided below.
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