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How to Create a Plan for Withdrawing Your Retirement Assets

While preparing for retirement is a good idea, having a plan in place for how to withdraw your savings is equally important. Without considering how you’ll use the funds in your accounts, you could run out of money or lose most of your savings to taxes. Here’s how to develop a strategy that’ll allow you to withdraw your retirement assets as efficiently as possible.

Check out our retirement calculator.

What to Consider Before Developing a Withdrawal Strategy

It’s important to understand how taxes will affect your retirement assets. Do you have a tax-deferred, tax-exempt or taxable investment account? How will your savings be taxed once you retire? Answering those kinds of questions will be helpful when you’re creating your retirement withdrawal strategy.

Diversifying your portfolio will help lower your investment risk. Having different retirement accounts that vary in terms of their tax treatment is also a good idea. For example, if you’ve put all your savings into a 401(k), consider opening a Roth IRA. While Roth IRA contributions are taxable, your withdrawals in retirement will be tax-free.

You should also be aware of required minimum distributions (RMDs). Certain types of accounts require you to begin withdrawing your savings around the time you turn 70 ½. If you fail to take RMDs, you could get hit with a 50% tax penalty. Since the rules for RMDs can be confusing, you may want to find a professional who can help you understand them and avoid fees.

Withdrawing Your Savings in Retirement

How to Create a Plan for Withdrawing Your Retirement Assets

There are many different retirement withdrawal strategies. The one that’s right for you will depend on the kind of investment accounts you have.

For example, let’s say you have taxable and tax-deferred accounts. Instead of withdrawing your savings erratically, it might be wise to use the profits from your taxable investment accounts first. You’ll have to pay taxes when you sell off your assets. But since they’ll be long-term investments, you’ll be taxed at a lower rate than your ordinary income tax rate.

Then you can tap into your tax-deferred accounts, such as your traditional IRA or 401(k). Just remember that you’ll have to pay a 10% penalty (in addition to paying ordinary income tax) if you withdraw your savings too early.

As a general rule, your Roth IRA should be last in line when you’re ready to use your retirement savings. That way, your savings can grow tax-free for as long as possible. If you die before using the money in your Roth IRA, your heirs won’t have to pay taxes on their distributions.

Alternatives to Cash Withdrawals 

While most retirees take their withdrawals in cash, it might make sense for you to take in-kind distributions. These are taken out as stocks or bonds and are assigned a fair market value. Taking in-kind distributions from an IRA could be a good idea if the investments in your account aren’t performing well and you’d rather trade them in for securities that’ll be more profitable.

Instead of taking a regular distribution, you could also make a charitable contribution. The Consolidated Appropriations Act of 2016 allows retirees age 70 ½ or older to make annual qualified charitable distributions of up to $100,000 from their IRAs. Since your distributions won’t count as taxable income, they won’t raise your tax bill. The downside, though, is that you won’t be able to get a deduction for making a donation.

The Takeaway

How to Create a Plan for Withdrawing Your Retirement Assets

It’s never too early to start planning for retirement. Deciding how to withdraw your savings can protect your assets and minimize your tax bite.

As you think about your withdrawal strategy, don’t forget to consider how your plan might affect your heirs after your death. Depending on the kind of account they inherit, they may have to take RMDs.

Tips for Getting Retirement Ready

  • Figure out how much you’ll need to save to retire comfortably. An easy way to get ahead on saving for retirement is by taking advantage of employer 401(k) matching.
  • Work with a financial advisor. According to industry experts, people who work with a financial advisor are twice as likely to be on track to meet their retirement goals. A matching tool like SmartAsset’s can help you find a person to work with to meet your needs. First you’ll answer a series of questions about your situation and goals. Then the program will narrow down your options from thousands of advisors to up to three registered investment advisors who suit your needs. You can then read their profiles to learn more about them, interview them on the phone or in person and choose who to work with in the future. This allows you to find a good fit while the program does much of the hard work for you.

Photo credit: ©iStock.com/xavierarnau, ©iStock.com/kali9, ©iStock.com/Yagi-Studio

Lauren Perez, CEPF® Lauren Perez writes on a variety of personal finance topics for SmartAsset, with a special expertise in savings, banking and credit cards. She is a Certified Educator in Personal Finance® (CEPF®) and a member of the Society of American Business Editors and Writers. Lauren has a degree in English from the University of Rochester where she focused on Language, Media and Communications. She is originally from Los Angeles. While prone to the occasional shopping spree, Lauren has been aware of the importance of money management and savings since she was young. Lauren loves being able to make credit card and retirement account recommendations to friends and family based on the hours of research she completes at SmartAsset.
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