The Order of Operations: How to Strategically Tap Retirement Funds

Let’s break down the best approach to strategically access your retirement funds.

Deciding how and when to withdraw from your retirement accounts is one of the most critical financial decisions you’ll make in retirement . The sequence you choose can significantly impact your overall tax burden, the longevity of your portfolio, and your ability to meet long-term goals. Let’s break down the best approach to strategically access your retirement funds.

1. Use Taxable Accounts First

Start with your taxable brokerage and savings accounts. These accounts offer the most flexibility and often have the least tax impact on withdrawals:

Why: Withdrawals from taxable accounts are typically taxed at capital gains rates, which are lower than ordinary income tax rates. Additionally, this preserves tax-advantaged accounts for later growth.

Bonus Tip: Harvest losses strategically to offset gains and minimize your tax bill further.

2. Tap Tax-Deferred Accounts Next (When Required or Needed)

Retirement accounts like traditional IRAs and 401(k)s are typically tax-deferred, meaning you haven’t paid taxes on contributions or growth. These accounts should be used with a focus on minimizing tax spikes:

Required Minimum Distributions (RMDs): Starting at age 73 (or 75 if born in 1960 or later), you’re required to withdraw a specific percentage annually from tax-deferred accounts. Failing to do so can result in a steep penalty.

Why to Delay: Allowing these accounts to grow as long as possible maximizes the compounding effect of tax-deferred growth.

3. Leverage Roth Accounts Last

Roth IRAs and Roth 401(k)s are often the last accounts to tap for several reasons:

Tax-Free Growth: Contributions are made with after-tax dollars, and qualified withdrawals (after age 59½ and five years) are tax-free.

No RMDs (for Roth IRAs): Unlike traditional IRAs, Roth IRAs are not subject to RMDs, making them ideal for legacy planning or covering late-in-life expenses.

Why: Preserving Roth accounts allows tax-free growth for as long as possible and keeps these funds as a hedge against future tax increases.

4. Consider Social Security Timing

Deciding when to claim Social Security is another key factor in retirement income planning:

Delaying Benefits: Waiting to claim until age 70 increases your monthly benefit by 8% annually after full retirement age (FRA).

Why It Matters: Using other funds to delay Social Security can increase guaranteed income in your later years, helping offset longevity risk.

5. Strategically Balance Withdrawals

In many cases, the best strategy involves a mix of withdrawals from different accounts to manage taxes and cash flow effectively:

Tax Bracket Management: Withdraw just enough from tax-deferred accounts to stay within a lower tax bracket while covering expenses.

Roth Conversions: If you’re in a low-income year, consider converting a portion of traditional IRA or 401(k) funds into a Roth IRA. This can reduce your future RMDs and provide tax-free income down the line.

6. Account for Unexpected Expenses

While this framework is a strong starting point, life can throw curveballs. Large medical bills, home repairs, or family emergencies may require tapping accounts in a different order:

Emergency Funds: Keep a liquid, low-risk emergency fund for short-term needs to avoid withdrawing from tax-advantaged accounts during market downturns.

Annuities or Pensions: If you have these income sources, they can help cover unexpected costs without disrupting your withdrawal strategy.

Final Thoughts

The right withdrawal strategy for your retirement funds depends on your personal goals, health, tax situation, and income needs. A carefully crafted plan can help you minimize taxes, extend the life of your savings, and provide peace of mind.

Working with a financial advisor can help ensure your strategy is tailored to your unique situation, allowing you to maximize your resources and enjoy the retirement you’ve worked so hard to achieve.

The goal? A well-balanced plan that keeps your finances as healthy as your lifestyle—helping you stay wealthy, healthy, and happy in retirement!

By Andrew Rosen, Contributor