So you made it to retirement and now are wondering which accounts to pull from first for income? (Pretax, ROTH, Brokerage, Social Security, Pension, etc). Based on your tax planning and personal goals, here’s the order of operations strategy in retirement! #retirement #personalfinance #financialplanning #investing
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Where Should I Pull Funds From FIRST In Retirement? – Retirement Distributions
As you approach retirement, one of the most important financial decisions you will need to make is how to manage your retirement distributions. With the money you have saved and invested over the years, where should you pull funds from first in retirement? This question is important, as it can have a significant impact on your overall retirement income and tax situation.
One person who can provide insight into this question is Justin Hodges, a financial advisor with years of experience in helping individuals plan for retirement. According to Hodges, the first place to pull funds from in retirement should typically be your taxable accounts. These accounts include regular brokerage accounts, bank accounts, and any other investments that are not tax-deferred or tax-free.
Why start with your taxable accounts? Hodges explains that by doing so, you can potentially minimize the impact of taxes on your retirement income. Since the gains in your taxable accounts are already subject to taxes, you can use these funds first without creating a tax burden down the road. This strategy allows your tax-deferred accounts, such as your 401(k) or traditional IRA, to continue growing tax-deferred, maximizing their potential for future retirement income.
After depleting your taxable accounts, you can then start tapping into your tax-deferred accounts, such as your 401(k) and traditional IRA. These accounts have grown tax-deferred over the years, allowing your investments to compound without being subject to immediate taxes. However, once you start taking distributions from these accounts, the withdrawn funds will be subject to ordinary income tax.
Finally, Hodges suggests utilizing your tax-free accounts, such as a Roth IRA, as a last resort for retirement income. Since Roth contributions are made with after-tax dollars, you can withdraw these funds tax-free in retirement. By leaving these accounts untouched for as long as possible, you can continue to benefit from potential tax-free growth and withdrawals in the future.
It’s important to note that everyone’s financial situation is unique, and the best strategy for retirement distributions will depend on individual circumstances. Consulting with a financial advisor who can assess your specific needs and goals is crucial in determining the most effective approach for managing retirement income.
In conclusion, when it comes to retirement distributions, pulling funds from your taxable accounts first, followed by tax-deferred accounts, and then tax-free accounts can potentially help maximize your retirement income and minimize the impact of taxes. By implementing a strategic approach to your retirement distributions, you can help ensure a more secure and comfortable retirement.
If you don't need that pre-tax money to begin your retirement, and have plenty to draw from in your brokerage account, then it would seem to make more sense to convert the pre-tax to a roth over time while drawing from your brokerage account. I think you need to qualify your order recommendation based on how much you have to work with in your brokerage account. Some of us that spent many years working for companies that didn't have retirement plans have accumulated quite a substantial amount there.
This is great advice. Distribute assets according to taxability in the following order: ordinary income, capital gains, and then tax-free. If you're smart, you'll minimize ordinary income assets and only sell enough capital gains assets to keep you under the 15% capital gains income limit. Then you have tax-free assets. It's perfectly possible to have completely tax free income after your traditional IRA and 401k assets are exhausted, minus social security. That's my plan.