How to Make Retirement Account Withdrawals Work Best for You

Summary

Retirees can optimize their withdrawals from multiple account types to extend portfolio longevity, increase after-tax spending, and maximize after-tax inheritances for heirs. By carefully managing withdrawals, retirees can take advantage of low tax brackets, untaxed capital gains, and the step-up in basis at death.

The paper examines three scenarios:

Scenario 1: Modest Income

• Goal: Avoid running out of money and potentially leave an estate.
• Strategy: Focus on spreading out tax-deferred distributions to take advantage of low tax brackets.

Scenario 2: Affluent with Taxable Accounts

• Goal: Avoid running out of money while leaving an estate.
• Strategy: Consider using untaxed capital gains by selling taxable investments during low-income years.

Scenario 3: Estate Planning

• Goal: Maximize after-tax inheritance for heirs.
• Strategy:
  • Prioritize Roth distributions to enable untaxed capital gains and leave tax-deferred distributions to heirs.
  • Prioritize tax-deferred distributions, using Roth distributions to spread out taxable income.

Key Considerations:

• Tax rates: Federal income taxes, Social Security benefits, dividends, capital gains, and estate taxes all impact withdrawal strategies.
• Heirs’ tax rates: The after-tax inheritance for heirs can be optimized by considering their tax rates when choosing which assets to leave them.
• RMDs: Required Minimum Distributions from retirement accounts can limit flexibility after a certain age.
• Other factors: Retirement age, life expectancy, and risk tolerance also play a role in withdrawal planning.

It’s important to note that the strategies discussed in this paper are not one-size-fits-all. Consulting with a financial advisor is recommended to determine the best approach based on individual circumstances.