Determine when and how to withdraw from retirement savings
These tips — and some guidance from a financial professional — can help you make more informed decisions when it's time to start drawing from your retirement savings.
You've spent your career saving for retirement. Once you retire, the challenge will be figuring out how to draw from your retirement savings. After all, how you withdraw your retirement savings can greatly affect how long it will last.
First steps
Start by deciding how much you'll need to pull from your savings each year. These steps will help.
- Determine how much you need to spend each year.
- Determine how much of your need is offset by Social Security, pensions, income annuities and work income.
- Categorize your savings (because any remaining need will come from retirement savings) into two buckets as follows:
- Accounts built with after-tax dollars, such as bank accounts and investments that are not tax-deferred
- Tax-deferred accounts, such as individual retirement accounts (IRAs), 401(k)s and 403(b)s
Withdrawing from your savings
Generally, your first stop for withdrawals should be required minimum distributions (RMDs) from tax-deferred accounts. That's because any amount of RMDs not taken for the year as required will be subject to an excise tax of 50 percent of the amount not distributed.
Next, consider withdrawing from accounts that are taxable to you — regardless of whether you spend or reinvest the distributions. Examples include capital gains, dividends and interest.
For most retirees, withdrawing more than the RMD from tax-deferred accounts should be the last choice. This is due to the way these accounts are taxed — every dollar withdrawn from tax-deferred accounts is taxed as ordinary income.
However, if you're in a year in which your overall income is lower than normal or if you feel your future tax rate will go up, you may want to think differently. Consider drawing from tax-deferred money up until the point that it would push you into the next marginal tax bracket.
You may also opt to draw from tax-deferred money if you want to pass some money on to heirs that will potentially be in a high future tax bracket. It may benefit them to receive taxable accounts because of the potential step-up in basis these types of accounts may receive upon your death.
Help from a Financial Professional
If you have questions call The Principal at 1.877.788.7242 ext. 48403 to learn more. Or...
Find out how a financial professional or advisor can help.
You should also consult with your tax advisor before making any decisions, because no single withdrawal strategy is right for everyone. Because how you withdraw your savings can have such a big impact on how long your savings may last, this is a crucial time to seek guidance.
