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Retirement Income: Which Accounts to Withdraw from First

Posted by Seton McAndrews | CFP®, Vice President Investments
September 10, 2014

Which Retirement accounts to withdraw from firstOften times your fixed sources of income like Social Security and pensions will not fully meet your retirement income needs. This likely means you’ll need to tap into your investment accounts to increase your income.

But which accounts should you draw from first, and when is the right time to take distributions? Here’s a general guide for choosing which accounts to draw down first and why. Remember, which approach you take depends on your unique situation and goals.

Tip #1: The Benefits of Starting with Your Tax-Deferred Accounts

Recent research suggests that it may make most sense to draw down your tax-deferred assets, like IRAs and 401(k)s, first. A study conducted by Lewis Coopersmith, Ph. D., and Alan Sumutka, CPA of Rider University cited two reasons this approach is beneficial:

1. Avoiding Large Required Minimum Distributions (RMDs)

If you have a large IRA balance, and you wait until age 70½ to begin making distributions, IRS rules may force you to take large RMDs. This could push you into a higher tax bracket, reducing tax efficiency and thus having a negative wealth effect.

2. Reducing Taxes for Your Heirs

Your heirs will probably owe income tax on any distributions they take from an inherited IRA, since your taxable estate includes your IRA balances. Drawing down your IRAs during your lifetime and leaving your heirs taxable accounts or Roth IRAs could be a more tax efficient approach.

Another consideration is that when you retire, you most likely fall into a lower tax bracket (since you are no longer making a full income). As such, distributions from your IRAs/401(k)s should be taxed at lower ordinary income rates.1

Tip #2: Creating Retirement Income Streams from Multiple Accounts

It could also make sense to devise a strategy that combines multiple accounts – like your IRA and a taxable joint account (JTWROS) – to create multiple income streams. This approach could work when your desired retirement income bumps you up into a higher tax bracket.

For instance, let’s say you’re married (filing jointly) and need $100,000 in retirement income per year. That means you will be in the 25% tax bracket - if you draw all $100,000 from your IRA (since withdrawals from Traditional IRAs are taxed at ordinary income rates).

However, if you were to take $70,000 from your IRA, and the remaining $30,000 from your taxable or another account not taxed at ordinary income rates, you could increase your retirement income while potentially avoiding the bump into the 25% income tax bracket.2

Tip #3: Save Your Roth IRA For Last

Roth IRAs are included as part of your overall taxable estate, however your beneficiaries will be able to take distributions from it tax-free. This makes Roth IRAs very attractive estate planning accounts.1

It also means you can elect to invest your Roth IRA in a more growth-oriented strategy during your lifetime, which can yield to the possibility of the account experiencing appreciation over time.

Creating a Customized Retirement Income Strategy for You

In planning your retirement income strategy, it is important to keep one thing in mind: everyone’s situation is different. Your retirement income needs, your tax situation, your estate planning goals, and the type of investment accounts you own should all factor into your chosen approach, and your financial advisor should regularly review these factors to determine the most appropriate retirement income strategy.

One of our Wealth Managers can review the accounts you have earmarked for retirement, to help you determine a retirement income strategy that makes sense given your objectives. Give us a call today at 1-800-541-7774 and one of our Wealth Managers can get started in creating an investment plan for you. Or click here to get started by answering a few questions.

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Seton M. McAndrews Certified Financial PlannerBy Seton M. McAndrews, CFP®

Seton is a CERTIFIED FINANCIAL PLANNERTM professional and Vice President of Investments at WrapManager, Inc.



1 MarketWatch

2 JP Morgan Asset Management

To the extent this presentation includes any state or federal tax advice, the presentation is not intended or written by WrapManager, Inc. to be used, and cannot be used, for the purpose of avoiding federal tax penalties. WrapManager, Inc. does not advise on any income tax requirements or issues. Use of any information presented by WrapManager, Inc. is for general information only and does not represent tax advice either express or implied. You are encouraged to seek professional tax advice for income tax questions and assistance.


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