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Withdrawing money in retirement
If you’ve been socking money away, seeding a variety of retirement accounts, you’ll enter retirement with a lot of choice — and decisions.
One of those decisions will be which investment to dip into first.
According to investment experts, the traditional approach involves withdrawing from individual accounts in a certain order, namely: taxable accounts, then tax deferred accounts, and finally Roth accounts (which have tax free withdrawals). This allows tax-deferred assets to grow longer and faster.
Fidelity Investments suggests that those with multiple retirement savings accounts and relatively even retirement income considering proportional withdrawals. An investor would withdraw from each account based on that account’s percentage of their overall savings. That could help stabilize your tax bill over retirement and potentially result in lower lifetime taxes and higher lifetime after-tax income.
Another variable when deciding which order to withdraw retirement funds is whether you intend to pass any investments down to your heirs. In that case, you should understand the notion of a step-up.
A step-up occurs when your original investment has appreciated, and upon your death, your heirs inherit the cost basis of the investment’s value at the date of your death.
However, this applies only to investments in taxable accounts and not those in IRAs, Roth IRAs, or 401(k) plans which puts the withdrawal scenario at play once again (if at all; perhaps you have no plans to tap into certain investments).
As always, consult with a financial professional. Investment decisions can quickly get complicated, and each individual’s circumstance is unique.
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