If you’ve saved tax-deferred, either in a 401(k) or IRA, you must begin taking required minimum distributions (RMDs) at age 72, which are taxed at ordinary income tax rates. Roth IRAs and brokerage accounts are funded with after-tax money and do not require the original owner to withdraw the funds. After age 59 ½ withdrawals from Roth IRAs are tax-free, prior to 59 ½ you may incur a 10% early withdrawal penalty. Brokerage account withdrawals are also tax free, but you will be subject to any capital gains taxes generated from selling investments inside the brokerage account.
So, where do you begin withdrawing money? In general, we recommend investors leave money in tax-deferred accounts for as long as possible. The funds in tax-deferred accounts can grow unencumbered by income tax, meaning the compound growth will be more beneficial. Therefore, the recommendation is to first tap your taxable account, then your tax-deferred accounts. If you are age 72 or older, you should withdraw your RMD first, then from your taxable account. The last source you tap should be your Roth IRA. This money is generally completely tax free and can also be used as a vehicle to pass your wealth to your heirs.
While you cannot avoid the taxes due on tax-deferred accounts, brokerage accounts often can benefit from favorable long-term capital gains rates. If you dollar-cost averaged into your investments over the years, you should be able to identify specific tax lots to sell to control your tax situation. For example, you may have an overall gain in XYZ Corp.; however, if you purchased shares above or at the stock’s current price today, you could supplement your RMD income with withdrawals from your brokerage account with minimum tax consequences.
How much you can or should withdraw is dictated by your financial plan. A financial plan considers all your income and projects growth, inflation, and annual spending into the future. If you are following the Ten Year Rule—setting aside 10 years of assets in fixed-income investments to protect principal—your financial plan will also dictate your asset allocation between fixed and growth within your various accounts. When you do withdraw your funds, you will know how much you can spend each year and how long your assets will last.
Your plan is also based on your goals for your money. Some investors want to die owing a dollar while others wish to pass their wealth to future generations. These goals not only affect your yearly spending but how the assets are invested and withdrawn. For example, if an investor does not want to leave an inheritance, we’d recommend he withdraw assets from his IRA to satisfy his RMD, then sell specific tax lots in his taxable account staying within his marginal tax bracket, and then pull assets from his Roth IRA to supplement his spending. If an investor wanted to leave his money for future generations, we’d recommend he first satisfy his RMD, and if his annual spending allowed it, he could convert additional IRA assets to a Roth IRA, lowering future RMDs and move assets into an account where they can continue to grow.
If you have questions on how to begin withdrawing your assets, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166
This article is for demonstrative and academic purposes and is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
