Strategic Retirement Withdrawals:
How to Minimize Taxes and Maximize Savings by Roy Gagaza
As explained by Roy Gagaza, Entering retirement with a well-structured withdrawal plan is crucial to ensuring your savings last and minimizing the taxes you owe. By adopting tax-efficient strategies for withdrawing funds from your retirement accounts, you can keep more of your hard-earned money and extend the life of your nest egg
Prioritizing Taxable Accounts
One effective strategy is to withdraw from your taxable accounts first These accounts are subject to capital gains tax, typically lower than the ordinary income tax rates applied to traditional IRAs and 401(k)s. Using these funds first allows your tax-advantaged accounts, like IRAs and Roth IRAs, to continue growing tax-deferred or tax-free
Balancing Tax-Deferred and Tax-Free Withdrawals
After depleting your taxable accounts, consider balancing withdrawals between tax-deferred and tax-free accounts For example, taking distributions from a traditional IRA or 401(k) will increase your taxable income, potentially pushing you into a higher tax bracket To mitigate this, you can supplement these withdrawals with tax-free distributions from a Roth IRA. This approach helps to control your annual taxable income and reduce your overall tax burden
Managing Required Minimum Distributions (RMDs)
Once you reach the age of 73, the IRS mandates that you begin taking RMDs from traditional IRAs and 401(k)s These distributions are subject to income tax, and the penalties for not taking RMDs are steep Planning your withdrawals, starting earlier than required, helps spread out the tax impact and prevent large, tax-heavy withdrawals later in retirement.
Consider Roth Conversions
Roth conversions involve moving money from a traditional IRA to a Roth IRA, allowing for future tax-free withdrawals. While you’ll pay taxes on the amount converted, this strategy can be beneficial if you expect to be in a higher tax bracket later in retirement Converting during years with lower income can be particularly advantageous
By carefully planning your withdrawals, you can maximize your retirement savings and reduce the taxes you owe, helping you enjoy a more secure and comfortable retirement