How To Withdraw Money From Your Retirement Accounts in the Most Tax-Efficient Manner Possible
When it comes to generating income in retirement from your various accounts, conventional wisdom would have you withdraw money from your taxable accounts first, then your tax-deferred accounts and, finally, your Roth account.
And, there’s some logic to this approach, says Roger Young, a senior financial planner and vice president with T. Rowe Price Associates. “If you draw from taxable accounts first, your tax-advantaged accounts have more time to grow tax-deferred,” he noted in a recent paper, Retirement Pulse: Tax-Efficient Withdrawal Strategies. “Leaving Roth assets until last provides potential tax-free income for your heirs. Plus, it is relatively easy to implement.”
Unfortunately, he noted in the paper as well as in our Retirement Daily podcast, the conventional wisdom approach may result in income unnecessarily taxed at high rates. What’s more, he notes, this approach does not consider the tax situations of both retirees and their heirs.
In our Retirement Daily podcast, Young discussed how best to generate tax-efficient income in retirement given the three objectives retirees may have: extending the life of their portfolio; more after-tax money to spend in retirement; and bequeathing assets efficiently to their heirs.
The essence of our discussion: Investors who have more than one type of account for retirement—taxable, tax-deferred, and tax-exempt (Roth)—should take advantage of those accounts’ different tax characteristics.