Smart Retirement Withdrawal: Start with the Best Account (Avoid Common Errors!)

Most people get it wrong when they talk about the ideal withdrawal order of investment accounts.

In this video, Alex explains a simple withdrawal framework to help you pay the lowest tax bill possible.

Smart Retirement Withdrawal: Start with the Best Account (Avoid Common Errors!)


Full transcript:


Alex Okugawa 0:00
Most people get it wrong when they talk about the ideal withdrawal order of investment accounts in retirement. And in this video, I’m going to provide you with a simple withdrawal framework to help you pay the lowest tax bill possible. By the end of this video, you’ll have the knowledge you need to look at your own situation and begin strategizing your ideal withdrawal order.

The generic advice out there is the first account you should withdraw from is your non-retirement account. Then pre-tax accounts like IRA or 401 K, and then finally, your Roth IRA. And in general, that is correct. The reason for this logic is because you want to allow your tax-advantaged retirement accounts like IRAs, 401(K)’s, or Roth IRAs, to grow as long as possible. You see, the whole reason for having this discussion is because of taxes and believe it or not, taxes will likely be your biggest lifetime bill. And most retirees are shocked when they realize how much tax they’re really going to pay in retirement.

Here’s how those different accounts are taxed. And we’ll show this on the screen. So tax-deferred accounts like IRAs or 401(K)’s pay tax at what is called ordinary income rates on withdrawals. While that account is growing, you don’t pay any tax. But eventually, you do have to take forced distributions and these are often called required minimum distributions.

Roth accounts, on the other hand, don’t pay any taxes on qualified withdrawals. There’s no tax while the accounts growing and there are no forced distributions.

A non-retirement account or taxable account will pay taxes on withdrawals depending upon several factors like capital gains. It also made to pay taxes as the account grows due to dividends. And this account could be considered to have forced distributions since investments like mutual funds often distribute capital gains, whether or not you want them or not, which are taxable.

As you can see, this all comes down to taxes. For example, if you have a million-dollar IRA, and you’re in the 22% federal tax bracket, that means the IRS has claimed steak on $220,000 of that account. If you live in a state with income taxes, such as California, as I do, that tax number could jump up to $300,000 or more.

If we’ve never met before, my name is Alex Okugawa. I’m a certified financial planner here at One Degree Advisors. And if you’re enjoying this content so far, please leave us a like it helps us reach more retirees like you retire with confidence.

Now your ideal retirement withdrawal strategy is going to depend upon two main factors, your current and future expected tax situation, as well as your expected required minimum distribution.

So here’s a general framework. If your RMDs will not be a problem in retirement, in other words, they won’t be significantly higher than the income you need. Then in general, you’d want to take withdrawals from your pre-tax and your non-retirement accounts to maximize the lower tax brackets, then you can save your Roth IRA for last.

If your RMDs will be a problem in retirement. In other words, they will be significantly higher than the income you need, thereby causing you to pay more taxes or pushing you into higher tax brackets, then this is where things could get a little bit more complicated. While it makes sense to take withdrawals from your non-retirement accounts first, you’ll likely want to begin moving money from your IRA into your Roth IRA. This is known as a Roth conversion, and it is a taxable event, and you can use your non-retirement account to help pay the taxes on the conversion. And you do this to maximize your lower tax brackets while lowering your IRA balance intentionally, thereby reducing future RMDs.

There are a host of other considerations such as making sure you don’t push yourself into higher Medicare premium surcharge brackets. Anthony and I discussed IRMAA brackets and why they can be so unforgiving and why you really need to start looking at these brackets when you’re 63 due to the way the calculation method works. You can learn more about that in the video below.

Once again, this is Alex Okugawa from One Degree advisors and if you enjoyed today’s video, please like and subscribe for more it helps us grow the channel to reach more people like you and help them retire successfully and with confidence. We also created a guide called Five retirement mistakes to avoid you can download that for free. It’s our gift to you and it’s in the description below.

Thanks for watching

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