You’ve probably worked long and hard for your money. Now that you’re in retirement, you want to make all those dollars you’ve diligently saved go farther and last longer. Taking funds from your retirement accounts in a tax-efficient manner is one way to help.
Why you should maximize tax-efficient withdrawals
Most people do not enjoy paying taxes. Contributing to the tax base is a necessary part of being in a functioning society — especially if you value things like schools, roads, and trash collection — but you probably want to avoid forking over more than you absolutely must.
As such, it behooves you to find ways to minimize the amount of money you shell out for taxes. When you’re in retirement, this becomes even more poignant. Savvy tax-efficient withdrawal methods can help you preserve more of your retirement savings for you to use as you need or want.
Planning ahead for retirement is paramount
You don’t want to run out of money in retirement; and saving for retirement generally takes many years to do. Hopefully, it’s clear why planning far in advance of retirement is so important.
By giving yourself decades of lead time, you’ll have a greater chance of retirement savings success. You’re giving yourself:
- Time to let your investments exponentially earn money for you.
- Bandwidth to do other meaningful things with your life — like have a family, buy a home, get an education, start a business, or travel — without sacrificing your financial security during retirement.
- Room to absorb uncertainty and the unexpected — such as an unplanned job loss, a lengthy illness, or a natural disaster.
With your sights set on tax efficiency, it becomes even more critical to develop extended-range retirement savings and withdrawals plan.
Key takeaways for tax-efficient withdrawals in retirement
We’ll get to specific strategies for tax-wise disbursements from your retirement accounts in a moment. First, though, let’s touch on some general best practices for managing the outflows from your retirement savings. These dos and don’ts can shape your tax landscape.
Dos of retirement savings withdrawals
There’s a lot you can do to optimize your retirement funds. Below are some of our top recommendations to be proactive and smartly draw money from your accounts.
- Do watch your savings and spending. Create a sensible budget and stick to and track it.
- Do factor in gift and charitable giving. Certain disbursements of money can change your tax obligations.
- Do be mindful of contributions. Income — from dividends, a job, etc. — can impact your retirement financial roadmap and responsibilities.
- Do keep periodic tabs on the markets. Rebalance or otherwise adjust your investment/withdrawal plans accordingly.
- Do consider the advice of your financial advisors. Your CPA and financial planner are trained experts in their disciplines — let them help you be informed and make solid decisions.
Don'ts of making withdrawals in retirement
Knowing what not to do is also incredibly helpful when trying to grow or stretch your retirement funds. Here are some expert tips on things to avoid:
- Don’t let RMDs sneak up on you. At a certain point, the IRS forces you to withdraw some amount of money from certain kinds of retirement accounts. This required minimum distribution (RMD) could have tax consequences for you and may necessitate adjusting your withdrawal strategy.
- Don’t assume that every day, month, or year will be the same. Markets can fluctuate over time.
- Don’t think that what worked for others will necessarily work for you. Everyone is different and has unique needs and constraints — and, accordingly, should have a bespoke retirement plan.
- Don’t live beyond your means. Consistent overspending could be trouble for your long-term budget.
- Don’t forget to factor in other life changes. Move? Have a child or grandchild? Get married? Often, major life events can influence your financial circumstances and should be accounted for in your retirement finances.
- Don’t rely solely on your financial management team. Becoming a knowledgeable participant in your own economic well-being is critical. Doing so requires getting high-quality information from multiple reputable sources, including your financial advisor.
7 Optimal tax-efficient withdrawal strategies to reach your retirement goals
Whether you’re creating a new financial plan or retrofitting an existing one to be more tax-efficient, you have plenty of approaches to consider.
To get you started, we’re highlighting just a handful of common techniques used to mitigate tax liability:
- Diversification. Not all financial instruments are created equal. Different kinds of accounts come with different taxation rules. Some are taxable, some are tax-deferred, and some are tax-free. By having a variety of account types, you can strategically withdraw from whichever one(s) make the most sense at a given time.
- Traditional withdrawal. Using this tactic, you’d pull savings from one account at a time. You’d draw on your taxable investments before moving on to tax-deferred and then tax-free savings. This could cut the taxes you owe, especially at the beginning and later portion of your retirement. However, the traditional approach is frequently subject to elevated taxes during the interim retirement years due to RMDs.
- Proportional withdrawal. This withdrawal model has you taking money out of taxable and tax-deferred investments concurrently. It can help minimize the RMD-induced peak taxes you might experience with the traditional withdrawal approach.
- Tax bracket management withdrawal. According to this method, a long-range plan is created to find the best accounts to withdraw from at a given period in time. It’s a complex, highly-customized, tax-centric strategy that includes plotting out when you’ll be in the lowest income/tax tiers and converting tax-deferred investments to tax-free ones.
- Delay Roth IRA disbursements. Leaving your ROTH accounts untapped for as long as possible can help you build additional tax-free savings. Plus, leftover ROTH money will become a tax-exempt inheritance.
- Tax loss harvesting. This is the practice of selling investments that have lost value and counting that loss against gains made by other investments in your retirement portfolio. The net effect is that it can drop your tax bill.
- Capital gains optimization. For retirement investments that are subject to capital gains taxes, it may be beneficial to hang on to the account long enough to to be eligible for better tax rates.
You may want to adopt a single strategy or more than one. As your life and financial situations evolve, you may need to employ a different game plan. Working with a qualified financial advisor is recommended if you need expert assistance figuring out what’s right for you.
Chatterton & Associates, helping you strategize a more efficient retirement
We know planning for retirement can be daunting. Add in complexities like the time horizons involved and taxes and it can seem overwhelming.
It doesn’t have to be! With the proper guidance, you can craft a retirement plan that’s appropriate for you and your needs. Chatterton & Associates is eager to help you understand your retirement options, establish a realistic and comprehensive retirement plan, and have a financially-stable retirement.
Our dedicated and knowledgeable team strives to build an enduring relationship with you. This enables us to learn more about you so that we can serve you better. Together, we can forge a personalized strategy for your retirement savings withdrawals, one that takes taxes into account.
Don’t hesitate to reach out today for a confidential consultation.
The Team at Chatterton & Associates
Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed. Federal tax laws are complex and subject to change. This information is not intended to be a substitute for specific individualized tax or legal advice. Neither Royal Alliance Associates, Inc., nor its registered representatives, offer tax or legal advice. As with all matters of a tax or legal nature, you should consult with your tax or legal counsel for advice.