Strategies
As you approach retirement, one of the most important decisions you’ll make is how to draw down your savings in a way that minimizes taxes while providing a steady income Tax-efficient retirement withdrawal strategies can significantly impact the longevity of your savings and ensure you pay the least amount of tax possible over your lifetime
The first step in creating a tax-efficient withdrawal strategy is understanding the different types of retirement accounts you may have These could include tax-deferred accounts like traditional IRAs or 401(k)s, Roth IRAs, taxable brokerage accounts, and others. Each type of account is taxed differently, and your goal should be to strategically draw from these accounts to minimize the tax burden
One common approach is the “tax-bracket ladder,” where you withdraw from your taxable accounts and Roth IRAs first, preserving the tax-deferred accounts for later in retirement when required minimum distributions (RMDs) will begin. This allows you to avoid pushing yourself into higher tax brackets too early in retirement Roth IRAs are particularly advantageous because qualified withdrawals are tax-free, so they can be used strategically for years when you anticipate higher income, helping to reduce your taxable income in those years
Another strategy is the “time-segmented approach,” which involves withdrawing from accounts based on when you need the funds. In this case, you may choose to tap into taxable accounts or Roth IRAs first, leaving your tax-deferred accounts for later when your withdrawals from those accounts are subject to RMDs. By doing this, you could potentially reduce the size of your tax-deferred accounts by the time RMDs start, lowering the amount you’re required to withdraw each year
Additionally, it’s essential to keep an eye on capital gains taxes, especially if you plan to sell investments in taxable accounts Long-term capital gains are taxed at lower rates than ordinary income, so you may want to hold off on selling assets in taxable accounts until you've owned them for more than a year This way, you’ll qualify for the lower long-term capital gains rate
One often-overlooked aspect of retirement withdrawals is coordinating with your spouse, if applicable A joint strategy that accounts for both your income and tax brackets can help minimize taxes over the long term. For example, if your spouse has a lower income than you, consider withdrawing from accounts that generate income taxable at your higher rate and leaving tax-deferred accounts for your spouse to withdraw later
The key to effective tax-efficient withdrawals lies in balancing the immediate need for income with the long-term goal of reducing taxes By developing a thoughtful withdrawal strategy that takes into account your tax situation, your account types, and your long-term needs, you can maximize the money you keep and minimize the money you pay in taxes