Does the 4% Rule apply in the same way to tax-deferred, tax-free, and taxable accounts? And how should one consider the different tax treatments of these accounts when coming up with a safe spending plan in retirement? I’ll cover these questions in today’s video.

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While still working as a trial attorney in the securities field, I started writing about personal finance and investing In 2007. In 2013 I started the Doughroller Money Podcast, which has been downloaded millions of times. Today I’m the Deputy Editor of Forbes Advisor, managing a growing team of editors and writers that produce content to help readers make the most of their money.

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When it comes to retirement planning, one of the key factors to consider is how taxes will impact your savings and income during your golden years. One popular rule of thumb that many financial experts recommend is the 4% rule, which states that retirees can safely withdraw 4% of their retirement savings per year without running out of money.

However, the tax implications of this rule can vary depending on the types of accounts in which your savings are held – tax-deferred, Roth, or taxable. Each type of account has its own set of rules and considerations when it comes to taxation.

Tax-deferred accounts, such as traditional IRAs and 401(k) plans, allow individuals to contribute pre-tax dollars, which can lower their current tax bill. However, withdrawals from these accounts are taxed as ordinary income, meaning that retirees will have to pay taxes on the amount they withdraw each year. This can affect how much retirees actually have to spend in retirement, as taxes can eat into their income.

Roth accounts, on the other hand, are funded with after-tax dollars, meaning that withdrawals in retirement are tax-free. This can be a major benefit for retirees, as they won’t have to worry about the tax implications of their withdrawals. However, contributing to a Roth account may not provide the same immediate tax benefits as a tax-deferred account, as contributions are made with after-tax dollars.

Taxable accounts, such as brokerage accounts and savings accounts, are funded with after-tax dollars and are subject to capital gains tax on any investment gains. While retirees won’t have to pay ordinary income tax on withdrawals from these accounts, they will have to pay taxes on any investment gains.

So, what does this all mean for retirees following the 4% rule? It’s important to consider the tax implications of your retirement savings when determining how much you can safely withdraw each year. If you have a mix of tax-deferred, Roth, and taxable accounts, you may be able to strategically withdraw from each account to minimize your tax burden.

For example, retirees may consider starting with withdrawals from taxable accounts to take advantage of potentially lower capital gains tax rates. They may then move on to tax-deferred accounts, paying taxes on the withdrawals at their current tax rate. Finally, retirees may consider tapping into Roth accounts last, as withdrawals from these accounts are tax-free.

Overall, understanding the tax implications of the 4% rule and how they apply to your specific retirement savings can help you make informed decisions about how much you can safely withdraw each year. Consulting with a financial advisor can also help you navigate the complexities of retirement taxation and develop a tax-efficient withdrawal strategy that meets your individual needs and goals.