“I need money!” Well, not me specifically… I’m talking about when my clients call me and let me know that they would like to withdraw some of their funds. You didn’t work all those years and diligently put money away to die rich, did you? You did it so that you could live comfortably and have money there when you needed it. Right?
Well, this is one area that might seem simple, but I’ve actually seen lots of mistakes. How you take your money out can have a big affect on your finances. There is actually an intelligent order in which you should tap into your accounts. If you do it right, you can both extend how long your money lasts and increase the amount you can pull out safely. All without changing your investments at all…
Be smart about taking withdrawals during retirement
To every rule there is an exception, so the order in which you should take your money out may vary based on your particular situation. That said, the list below describing a way to take your money out is a great guideline to begin with:
1. Taxable Income – This is your pension, your income if you are still working, your dividends and interest from your “taxable” accounts, your Social Security (if eligible), any rental income you have coming in, etc.
2. Principal from your Taxable investments – These may include stocks, bonds, mutual funds outside of your retirement accounts… there is even a smart way to take these monies out as well:
a. First sell all those investments that have dropped in value – If you make a determination that a bounce-back in value is not imminent, sell these to access both your needed cash and to harvest a tax loss to lower your taxes.
b. Second, take the cash from the accounts – this would be money markets and cash accounts from your non-retirement bank and brokerage accounts. It would also include maturing CDs. By utilizing these monies next, you accomplish a couple of things… these are probably your lowest yielding accounts and by using them, you will be lowering the amount of taxable interest, which will lower your taxes.
c. Third, sell those investments that have gone up in value - Choose the least attractive investments first… think those that have gone up the least, causing the lowest tax implications (you also have to consider the future potential of the investment, but don’t kid yourself here if your are strapped for cash).
3. Traditional IRA and 401(k) - (if you are in the 10% to 15% tax bracket) If your income is low enough to keep you in the lower tax brackets, withdraw money from here next… until your withdrawals would push you into a higher tax bracket.
a. If you can live without this income now consider – converting all or a portion of these accounts to a Roth IRA (whose assets will not be taxed in the future). Before you make a decision on whether this makes sense or not, please consult with me or a tax professional to help you look at both the advantages and disadvantages of converting to a Roth IRA.
4. Annuities (and traditional IRA and 401(k) if in a higher tax bracket) – Withdrawals from these accounts should be delayed as long as possible to take full advantage of their tax-deferred benefits. However, when you reach a point in which you need to begin withdrawing these monies, consider using this order:
a. Tap into the older spouses first – that will give the younger spouses assets longer to grow before they are likely to be needed.
b. Required distribution at 70 ½ - Obviously, once you reach the age in which you are required to make withdrawals from your traditional IRA and 401(k), you’ll need to take at least the minimum withdrawal regardless.
c. Your non-IRA annuities – Because your non-IRA annuities do not require minimum withdrawals, use these last to allow their tax-deferred benefits to accrue.
5. Home Equity – There are many advantages and disadvantages to tapping into your home equity. If you are still in need of money after tapping all of the resources I’ve talked about above, then here are some things to think about. Home equity lines of credit will usually give you the lowest interest rate so you should explore these first. You can also explore reverse mortgages but make sure you read the small print. Reverse mortgages tend not to offer very attractive interest rates… but it is always an option. Lastly, explore home equity loans but these should be as a last resort.
6. Roth IRAs – Your investments in your Roth shouldn’t be tapped until you’ve exhausted all other options. These assets are 100% tax-free to you and your heirs so leaving them until last makes absolute sense.
Hope this general guideline helps! As always, if you have any questions, please feel free to give my office a call at 952-746-1321.
Have a great day!