Which Accounts Should I Withdraw From in Retirement?

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If you have multiple types of accounts when you retire, you'll have to decide which ones to withdraw from. A retirement withdrawal strategy can help you see which withdrawal approach will be most beneficial to you over the long run.

There are three main retirement withdrawal strategies to consider, and each has many variations. Using the right approach for your situation can result in tax savings. A customized approach can save $50,000 to $100,000 in taxes over a 30-year retirement for many retirees. 

Conventional Strategy

Most people followed a conventional withdrawal strategy 10 years ago. They used non-retirement account savings and investments to support living expenses while waiting to withdraw from IRAs until age 70½ when required minimum distributions begin. This approach was often combined with starting Social Security early, between the ages of 62 and 65.

More research is available now on how this approach will work out over time, and retirees are getting smarter. Many are realizing that delaying the start of Social Security to age 66 or 70 will provide more long-term security.

You'll still have to decide which accounts to draw from while you're delaying Social Security. The best answer depends on your tax bracket. For those with pension income, the conventional withdrawal strategy often makes the most sense. While collecting the pension, you withdraw from non-retirement savings and investments and don’t touch your IRAs, 401(k)s or 403(b)s until you're required to do so.

For those with those with no pension income, or very small pensions such as a few hundred dollars a month, the next two strategies — reverse order or hybrid — may result in less taxes paid in retirement than the conventional approach.

Reverse Order Strategy

A reverse order retirement withdrawal strategy is when you withdraw from your retirement accounts like IRAs and 401(k)s first while letting any Roth IRAs and non-retirement account investments continue to accumulate. This can be the most tax-efficient approach for folks who have no pension, have a decent amount of savings in IRAs, and are delaying the start of Social Security until age 70.

Why would this approach be better? If you're retiring prior to age 70 and have no pensions, it's likely that your taxable income will be low between the ages of 60 and 70. By withdrawing from IRAs during the years where your taxable income is low, you can “fill up” the 10- and 15-percent tax brackets.

This makes a whole lot of sense if your required distributions from IRAs are likely to bump you into the 25-percent or higher tax bracket when you reach age 70½. It's better to withdraw now and pay 10 or 15 cents on the dollar than withdraw later and pay 25 cents or more on the dollar.

Hybrid Strategy

With the hybrid approach, you withdraw from multiple account types within the same year. For example, you may withdraw $20,000 from a non-retirement account by selling a mutual fund or cashing in a CD while also withdrawing $20,000 from an IRA. This approach works incredibly well when it is customized to your situation by projecting your tax rate over each year in retirement.

There are a few versions of the hybrid retirement withdrawal strategy. One version involves Roth IRA conversions. You spend down your non-retirement accounts while converting a portion of your IRA to a Roth IRA each year. The amount converted is determined by calculating what amount would fill up the 15-percent or 25-percent tax bracket. This approach works if you have enough funds in non-retirement accounts to pay the taxes on the Roth conversion amounts. The Roth conversions lower your future required minimum distributions and thus lower the amount of taxes you’ll pay at age 70 and beyond in many cases. 

Another way to implement this approach is to withdraw from both IRA and non-retirement accounts simultaneously, but without doing Roth conversions. This is often the best approach if you don’t have enough non-retirement account savings to cover both the tax on the Roth conversions and a portion of your living expenses.

A good retirement planner or tax professional can run a 20- to 30- year projection that estimates taxes and shows you how much should come from which accounts to result in the lowest amount of taxes paid over your retirement years.