It’s crucial to understand where to withdraw funds from first in retirement once you start relying on your investments for your monthly paycheck.
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Timestamps
0:00 – Using the wrong accounts first
0:56 – Start with your income sources
3:06 – Different types of accounts
4:37 – A baseline strategy for withdrawals
7:08 – Taking it to the next level
9:45 – Putting it all together
10:52 – Exceptions and tax considerations
11:58 – Do you want to keep more money?
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— About Patrick King CFP® —
Patrick King is a fee-only financial advisor in Atlanta and the Founder of Prana Wealth. Over his career, Patrick has helped CEOs, all-star athletes, Grammy-winning artists, and many others build their wealth, retire sooner, and create a legacy. Patrick enjoys yoga, mountain biking, golf, travel photography, and Clemson football.
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Don’t Use the Wrong Accounts First in Retirement!
When it comes to retiring, many people are concerned about making sure they have enough money to last through their golden years. One strategy that retirees often overlook is the order in which they withdraw money from their retirement accounts.
It may seem like a simple decision, but the order in which you withdraw money from your retirement accounts can have a significant impact on your tax bill and the longevity of your savings. Using the wrong accounts first can lead to unnecessary taxes and potentially running out of money too soon.
One common mistake retirees make is tapping into their traditional IRA or 401(k) accounts first. While these accounts may have the largest balances, they are also the most tax-advantaged. Withdrawals from these accounts are taxed as ordinary income, which can have a higher tax rate than other forms of retirement income.
Instead, it’s generally better to start by withdrawing money from taxable accounts, such as brokerage accounts or savings accounts. These funds are already subject to taxes, but the tax rates tend to be lower than those of traditional retirement accounts. By using these funds first, you can minimize your tax bill in the early years of retirement.
Another option is to consider converting some of your traditional IRA or 401(k) funds to a Roth IRA before retiring. While you will have to pay taxes on the converted amount, it can set you up for tax-free withdrawals in retirement. This can be particularly beneficial if you anticipate being in a higher tax bracket in the future.
Finally, it’s important to consider your Social Security benefits when deciding which accounts to tap into first. Delaying the start of your Social Security benefits can increase your monthly payments, which can allow you to draw down your retirement accounts at a slower rate.
In conclusion, the order in which you withdraw money from your retirement accounts can have a significant impact on your tax bill and the longevity of your savings. By carefully considering the tax implications and coordinating your withdrawals with other sources of retirement income, you can make the most of your retirement savings and ensure a more comfortable and secure retirement. So, don’t use the wrong accounts first in retirement and consult with a financial advisor to develop a plan that works best for your individual situation.
You have some fantastic content on your channel. At 53 years old, my wife and I achieved a net worth of $1 million back in 2017. Fast forward five years, and it has grown to $2.4 million. Despite our combined annual salary of just over $100,000, we have adopted a frugal lifestyle. We continue to drive older cars, prepare meals at home, and make use of leftovers. Additionally, we have two children currently in college. Fortunately, we had saved for their college expenses, and they are contributing by working part-time. As a result, they will graduate without any student debt.
on the taxable investments I understand that there's a way to avoid cap gains tax altogether, for MFJ in 2023 if taxable income is below $89,250 then cap gains are taxed at 0%.
Well Retirees who face challenges in covering their fundamental expenses are those who couldn't amass sufficient funds during their working years to ensure financial security in retirement. The decisions made regarding retirement planning can significantly impact one's financial situation. As an example, both of my parents devoted the same number of years to careers in the medical field. However, my mother chose to invest with the guidance of a financial advisor, whereas my father relied on a 401(k) plan. Consequently, upon retiring, my mother had approximately $5 million in retirement savings, while my father retired with approximately $3.8 million.
What if you have no heirs?
I’d be retiring/working much less in 5 years and curious to know best how people split their pay, how much of it goes into savings, spendings or investments? I earn around $150k per year, but nothing to show for it yet.
Does paying taxes from an IRA before age 59 1/2 during a Roth Conversion cause the 10% penalty as opposed to paying the taxes from a different source?
Waiting until 70 increases your retirement success rate to 99%. Of course, it does. You're only going to live like 2 more years. I used to be subscribed to this channel and watched it pretty religiously, but I found I don't really agree with anything said. I unsubscribed a long time ago but for some reason he popped up again. My strategy.
Take SS as soon as possible. You can't leave your SS check to your kids.
Annuities next. if you have them. The longer you take them the better chance you have of winning that game.
Taxable IRA next. To keep your RMD from getting out of hand when you turn 72.
Individual account next because you can balance out gains and losses and adjust what you take accordingly to reduce taxes.
Roth last if you need any money to balance the year out, again to reduce taxes.
That's just me.
How in the world does $8000 per month result in a 20% effective tax rate?
For those who are quoting 0% tax bracket please see here: https://www.ssa.gov/benefits/retirement/planner/taxes.html#:~:text=between%20%2425%2C000%20and%20%2434%2C000%2C%20you,your%20benefits%20may%20be%20taxable.
Married filing joint will be taxed with income over $44,000 up to 85% of their SS amount. It may be possible if they live in a state that does tax SS – being in a fed tax bracket of 12% + state income tax(es) and 20% may be close to accurate.
It all depends. When we pass, our investment accounts will get a step up basis when our kids inherit them. So if our goal is to pass our investment accounts to our kids, it's probably best to use the traditional IRA first.
With $96,000 in income (SS = $64,800, Pension = $12,000, T-IRA/401(k) = $19,200), worse case their federal tax liability would be $2,701. that's an effective federal tax rate of 2.814%. Even selecting the minimum tax withholding of 7% on Form W-4V should have them withholding $4,536 is would be far more than their maximum liability.
Also I'm not sure if you mentioned this, but capital gains harvesting can be done up $116,950 in 2023. This is $20,950 more than their retirement income needs This should be enough to let Kimberly and her spouse to effectively reset the cost basis in that $150,000 in taxable investments every year without ever paying taxes on the money. That means with a little bit of planning a retired couple with this level of income needs should never need to pay taxes on long term capital gains or qualified dividend income.
This leads me to conclude that actually taking income from T-IRA and Taxable sources something close to pro-rata is probably the optimal approach, at least if you can also reset the cost basis on your taxable investments.
With that said, other tax concerns may dictate your withdrawal strategy if you are retired before you are eligible for Medicare. That's because the impact of ACA subsidies on your taxes may dwarf the impact of things like avoiding taxes on capital gains or the desire to distribution (or convert to Roth) T-IRA assets as early as possible. Instead you may find yourself simply trying to keep your income low below 400% of the Federal Poverty Level.
In the case of a married couple that 400% ACA threshold sits at $78,880. That's an ACA specific MAGI that includes SS income. That means to have cash flow to cover $96,000 in expenses, you will want to spend either your cost basis or your Roth assets to cover that additional $17,120 in income. While this might seem counter productive, it's likely to produce a lot more in ACA subsidies than preserving your taxable cost basis or your Roth assets are worth.
$5400(social security)+$1000.00(pension)=6.400 monthly x12 months =$76.800 Annually with a 0% fed tax ,not the 20% mentioned@2:28
A hidden reason to use your taxable accounts first is a DOOMSDAY medical expenses. God forbid but if you need catastrophic medical care. The Government, Hospitals, Bill collectors all DEMAND you LIQUIDATE your accessible investments. Regardless of market liability or position. Retirement funds are semi protected. My CO worker had a massive stroke while working in his yard 2 months after retiring. Out of the blue. They had 525K in dividend stocks. They moved their 401k3b out of mutual funds into Dividend stocks. After that only SSN. (Somewhere a pension was cashed out for more dividend stock.) He died 2 years later in Nursing home. GOBBLE GOBBLE GOBBLE went everything. The new house they bought they made 1 payment. Simply abandoned it. Now his poor wife lives in the basement of their son's house. ONLY SSN is left with a 30% garnishment GOBBLING. She is in good spirits. But she jokes she needs to live to 156 to before she can get her full SS again. Luckily, they sold the vacation home to their other son 2 years ago or that would have been GOBBLED up two.
Burning a $50k brokerage account before a $900k tax deferred account DOES NOT net them $500k+ over their retirement.
With the amount of money this example shows, I don't think they would be paying 20% tax.
Need to find a balance between all accounts.
Love this. Thank you.