Your Tax-Savvy Withdrawal Strategy in Retirement

You’ve spent many years saving for your retirement. When it’s time to start withdrawing from these investment assets, do you have a tax-smart strategy?

After decades of working, many look forward to their retirement years and their newfound flexibility. Yet transitioning from receiving a paycheck to relying on retirement savings can be challenging. Having a withdrawal strategy in place can help you maximize your retirement savings while minimizing your tax implications.

Tax-efficient tips when it’s time to start withdrawing from your investment accounts:

1. Pay attention to Required Minimum Distributions (RMDs). When you reach age 72 (73 if you reach age 72 after 12/31/22), you need to take RMDs from your tax-deferred retirement accounts, which include 401(k)s, 403(b)s and Individual Retirement Accounts (IRAs). Failure to withdraw may result in a 25% penalty on the amount that should have been withdrawn.
2. Withdraw interest and dividends first. From your taxable account, withdraw the interest and dividends produced from your investments. While interest can be taxed as ordinary income, dividends are often taxed at a lower capital gains rate. This method can help the original investment grow while potentially earning more interest and dividends in the future.
3. Save the Roth Individual Retirement Accounts (IRAs) for last. Withdrawing from Roth IRA accounts should be a lower priority because Roth IRAs aren’t subject to RMDs and withdrawals are tax-free starting at age 59 1/2. It’s important to note that Roth 401(k) plans are subject to RMDs. Depending on your own personal situation, it may be a good idea to roll your Roth 401(k) account into a Roth IRA. If you open a new Roth IRA, the 5-year holding requirement will be implemented.

How much should you withdraw?
A good rule of thumb is to start by adding up all of your investments and then withdrawing up to 4% or 5% of your retirement savings within the first year of retirement. However, it may be necessary to add an additional percentage annually to that amount in subsequent years to adjust for inflation. A Jemma Financial Advisor can work with you to determine your personalized withdrawal rate.

Your personalized withdrawal strategy
There are many factors to consider when you start withdrawing money in retirement. At Jemma, we can help you understand your tax liability and create a tax-savvy withdrawal strategy based on your financial situation. Contact us to start the conversation.