How Do I Take Withdrawals in Retirement? Methods 1 & 2.

Several older couples walk down a path together.

27 Apr How Do I Take Withdrawals in Retirement? Methods 1 & 2.

Posted at 08:00h in Finances, Partners by Triage Cancer

Did you miss Tuesday's introductory blog? Read it now!

Method 1

Taxable (non-retirement) accounts first, Tax-deferred accounts second, Roth accounts last.

Pros:

Allows retirement accounts to grow for the longest time tax-deferred/free.
May allow Roth money to be passed on to heirs.
Lower tax bills in early retirement when you may be spending more on travel/hobbies.
Could have advantages on taxable Social Security calculations early in retirement.

Cons:

Continuing to grow tax-deferred accounts may push you into a higher tax bracket when MRDs are required at age 73.
Heirs may end up paying income tax on tax-deferred accounts.
Unpredictable tax bills through retirement

People using this method often are wanting to maximize the tax benefits of retirement accounts for as long as possible. Even into the next generation. It’s possible that they may not ever reap the benefits of the tax-free Roth accounts themselves.

Method 2

Tax-Deferred accounts first, Taxable (aka non-retirement accounts) second, Roth last.

Pros:

Spreads taxes owed on deferred accounts over a longer period of time.
Get ahead of Required Minimum Distributions, possibly keeping yourself in a lower tax bracket when those distributions begin.
More tax-efficient way for heirs to receive money left over from retirement. Receiving taxable accounts as an heir gives them a step-up in cost basis. Receiving Roth assets as an heir provides a tax-free pot to heirs.

Cons:

Larger taxes in early years of retirement when withdrawals are often higher.
You are paying the taxes on your kids’ inheritance as well as supporting your own retirement needs.
Potentially not using the lovely Roth assets during your lifetime.

This method might appeal more to the retiree who is concerned with how their estate gets passed to kids.

The worst type of account to inherit (as a non-spouse) is a tax-deferred account. Rules set out in the SECURE and SECURE 2.0 acts require that those accounts be withdrawn over the course of 10 years after your passing. That could likely coincide with your children’s highest earning years, subjecting the inheritance to very high tax bills.

Now, many retirees don’t care about that, which is totally legitimate! They figure any money their kids get is gravy and would rather keep their own tax bills low and not pre-pay taxes on a future inheritance.

Stay tuned for Part III and the conclusion next Thursday!

Written by Kristi Sullivan

My name is Kristi Sullivan and I have been helping people achieve financial security since 1996. I am a fee-only financial planner and public speaker. I do no investment or insurance sales for commissions. My clients pay me for guidance through their financial questions. I also work with employers to educate their employees about personal finance. I have been helping people make financial decisions for 18 years. I have worked in employee benefits and with individual clients/families. I hold the Certified Financial Planner designation. Sullivan Financial Planning, LLC is a Registered Investment Advisory firm with the State of Colorado. Areas of expertise include prioritizing savings goals, investment allocation, and wealth manager searches.

About Triage Cancer

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