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iweiss
Level 1

Retirement withdrawal strategy

Please provide a withdrawal strategy during my retirement that will minimize my taxes.   What is the order for my withdrawals and an explain why

Here are my income options

  • Pension
  • 401K/403B
  • Non-retirement mutual funds
  • Stocks
  • US Savings bonds
  • Savings account
2 Replies
JohnS_CPA
Employee Tax Expert

Retirement withdrawal strategy

This question is difficult to answer without detailed knowledge of your non-retirement plan assets, retirement plan assets, spending needs and the distribution requirements contained in the retirement plan documents. In general, (and this is very general) you would typically take the minimum amount required out of the retirement accounts and use your non-retirement assets to fund remaining expenses. This would allow the retirement plan assets to continue to grow tax free.

 

However, this strategy is dependent upon how much of your expenses can be funded by the minimum distributions, what kind of taxable gains you would have to recognize if you had to sell stocks and mutual funds to cover expenses and what the investment options are within the retirement accounts.

Your pension and 401k/403B plan documents are going to contain some type of wording on how much and when you have to start taking distributions. When you will NEED distributions will depend on what other assets and/or income is available to you. The longer you can let retirement assets grow, tax free, the better (in general).

 

However, selling non-retirement mutual funds and stocks may generate a tax liability. The amount will depend on your holding period and cost basis. Capital gains (Selling price less cost basis) can have some favored tax treatment depending on holding period but whether it makes sense for you to recognize those gains before using retirement assets is a very individual analysis. For instance, do any of your taxable account holdings generate dividends you can use to fund expenses? It may make sense to hold them for the income vs selling.

Distributions from retirement accounts are taxed at ordinary income tax rates while long term capital gains are (currently) taxed at, generally, lower rates. But your actual tax rates will depend on the amount and mix of income. With proper planning you will be able to optimize your mix of income for not only the current year but over a longer period of time.

 

Working in your favor: you have assets in taxable and non-taxable accounts. This may provide you great flexibility in designing a retirement strategy. A detailed plan is best left to a financial planner and/or a CPA who has access to all your assets information and retirement plan documents.  

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VincentL12345
Employee Tax & Finance Expert

Retirement withdrawal strategy

Any Retirement withdrawal strategy should be based on your tax bracket and whether your accounts are taxable/non-taxable (Roth) and ordinary/ investment income. For investment income/sales, whether the income comes from sales which can be long/short term should be used.

 

You basically have three "buckets":

 

The Pension and 401K/403B are in the first. These accounts will be taxed as ordinary income when you make withdrawals. Currently, you will take RMDs after 72 for 401k, 403b, and IRAs and after you retire from your pension employer you will probable receive a monthly pension after you stop working.

 

The second bucket are the Non-retirement mutual funds and Stocks. These are taxed at capital gains rate on the sale of the assets. Any income generated for dividends may qualify for a lower rate.

 

The final bucket are US Savings bonds and the Savings account. Any interest income will be taxed at the ordinary income rates.

 

Since the retirement accounts will have mandatory withdrawals, you will make this payments the foundation. You will add the third bucket income as a variable source of monies. Since any deposits or withdrawals will adjust any earned income received. The second bucket monies are as you go circumstances. You will only access these accounts on a need to basis. Since there is no requirement for you to sell the investments.

 

My suggestion is to focus on your tax bracket in determining the impact of taxes on your income strategy. If you can fill up the bracket without going to a higher bracket. I do not know your tax bracket but here is an example:

 

Tax Brackets and Rates, 2021

22%

$40,526 to $86,375

$81,051 to $172,750

24%

$86,376 to $164,925

$172,751 to $329,850

32%

$164,926 to $209,425

$329,851 to $418,850

35%

$209,426 to $523,600

$418,851 to $628,300

 

Using the above bracket amounts of $40,526 to $86,375. If your adjusted gross income is $50,000, you will not enter a higher tax bracket until you make $36,375 more to fill up the bracket. Do not forget to withdraw your standard deduction amount from your gross income to arrive at your adjusted gross income.

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