Withdrawing savings: Making the most of your retirement money

Woman in retirement benefiting from having a retirement savings withdrawal strategy.

The way you withdraw your retirement savings can have a big impact on how long your money will last. Get tips for creating a withdrawal strategy that maximizes what you’ve saved.

Deciding how much to withdraw

You've spent your career saving for retirement. But once you retire, how do you responsibly withdraw money from your retirement savings?

First, decide how much you'll need to pull from your savings each year:

  1. Determine how much you need to spend each year.
  2. Determine how much of your need is offset by Social Security, pensions, income annuities, and work income.
  3. Categorize your savings into two buckets:
  • 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 retirement 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 will be subject to an excise tax of 50% 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 generally 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 This is due to the way these accounts are taxed—every dollar withdrawn from tax-deferred accounts is taxed as ordinary income.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.

Consider your heirs

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.

Get help with your strategy

Consult your tax advisor before making any decisions, because no single withdrawal strategy is right for everyone. How you withdraw your savings can have a big impact on how long your savings may last, so this is a crucial time to seek guidance.

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*Individuals with IRAs and highly compensated employees (HCEs)—those who are greater than 5% owners or earn more than $120,000 in compensation, as of 2017— with qualified retirement plans are required to receive a minimum distribution by the April 1 following attainment of age 70½, and each December 31 thereafter.

For employees with qualified retirement plans who are not HCEs but are still actively employed, RMDs can be delayed until April 1 of the year following the year they terminate employment, and each December 31 thereafter. RMDs may also apply to some beneficiaries.