How to Determine the Order of Accounts for Retirement Withdrawals: Traditional vs. Other Options

When it comes to withdrawals from retirement accounts, the order in which you withdraw money from your various accounts can be an important consideration. The sequence of accounts you withdraw money from can have a significant impact on the longevity of your savings, the amount of taxes you pay, and even your Social Security benefits. The traditional withdrawal sequence has its advantages, but alternative approaches may be beneficial depending on your goals.

In this article, we will explore the traditional withdrawal order, discuss alternative strategies, and highlight what each method seeks to achieve.

traditional withdrawal order

The traditional retirement withdrawal strategy is a straightforward approach that typically follows the following sequence:

1. Taxable Accounts (For example, savings and brokerage accounts): The reason to withdraw from these accounts first is that long-term capital gains are often taxed at a lower rate than ordinary income, which allows tax-deferred accounts to continue to grow.
2. Tax deferred accounts (e.g., 401(k)s, traditional IRAs): Withdrawals from these accounts are subject to ordinary income tax, and required minimum distributions (RMDs) must begin at age 73 or later, depending on your date of birth.
3. Tax-Exempt Accounts (For example, Roth IRAs): Roth IRAs are often held until the end because withdrawals from these accounts are tax-free, provided the rules are followed. Because Roth IRAs do not require minimum distributions (RMDs), they can be left to grow indefinitely.

benefits: The traditional retirement withdrawal arrangement is widely recommended because it is designed to maximize tax efficiency and extend the life of your retirement savings. Here are the main reasons to consider a traditional withdrawal arrangement:

• Maximizing tax-deferred growth
• Take advantage of low capital gains rates.
• Maintaining tax-exempt accounts
• Mitigate the impact of taxes on you over time.
• Estate Planning Considerations – If you are planning to leave a legacy, it may make sense to leave tax-deferred assets to the heir.
• Increase your after-tax cash flow and increase your disposable money.

proportionate approach To withdrawals

A Mixed or proportional withdrawal strategy This system involves withdrawing money from taxable and tax-advantaged accounts in roughly the same ratio as each other. By carefully balancing withdrawal amounts, retirees can manage their tax bracket more efficiently.

benefits:

• Tax bracket managementBy withdrawing money from taxable and tax-deferred accounts, you may be able to control your taxable income and avoid jumping into a higher tax bracket.
• Smoother tax impactRather than dealing with large tax bills in later years due to required minimum allocations, this method spreads the tax burden more evenly over time.
• Shadow tax reduction: Depending on your situation/circumstances, a proportionate approach may help you avoid having more of your Social Security benefits taxed, and/or having additional IRMAA charges imposed on your medical insurance premiums.

Reverse traditional withdrawal order

Reversing a traditional retirement withdrawal order involves taking advantage of Tax-exempt accounts (such as Roth IRAs) first, followed by Tax deferred accounts (such as traditional IRAs and 401(k) accounts), and finally withdrawals from Taxable AccountsThis strategy is less commonly used but can offer specific benefits depending on an individual’s goals and tax situation.

benefits: Reversing the traditional withdrawal order—starting with IRAs, moving to tax-deferred accounts, and saving taxable accounts until last—can provide tax benefits, especially in the early years of retirement. It can help retirees keep their taxable income low, manage taxes efficiently, and delay needed tax deductions, which can lower their overall tax burden. However, it also reduces the long-term growth of tax-exempt assets and could leave retirees with larger needed tax deductions in the future if not managed carefully.

This strategy is especially useful for those who prioritize Tax Efficiency in Early Retirement And I want to Maximize flexibility When managing taxable income. It is also useful for early retirees who are looking to maximize their premium tax credits for health care plans under the Affordable Care Act.

How to choose which withdrawal order to use for retirement?

The answer to this question depends entirely on your goals. You can now use the Boldin chart to compare a traditional withdrawal request to a custom request of your choice!

• Start by going to My Plan > Money Flows.
• Go to the section called “Withdrawal Order” and select the Edit button.
• Select the custom tab.
• Reorder your accounts and click “Save”.
• You can instantly see changes over your lifetime in savings, estate value, and lifetime taxes. And evaluate charts showing withdrawals by type and account.
• You can return to the traditional account arrangement at any time you want.

Note: You may want to play with this feature by copying a version of your basic plan to a new scenario, but you can always revert to the traditional account arrangement.