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Smart Ways to Withdraw Retirement Assets

Preparing to live a comfortable retirement involves more than just saving. It also includes a smart withdrawal strategy.

There are pros and cons to withdrawing money from any of your retirement accounts. That's why, before you make any tax or withdrawal decisions, it's smart to discuss those moves with a trusted tax advisor or investment representative.

Currently-Taxable Investments vs. Tax-Deferred Accounts

Some financial advisors recommend tapping into currently-taxable investments (such as shares of stock, mutual funds, money market accounts, and Certificates of Deposit) before withdrawing from tax-advantaged savings, such as IRAs or annuities.  This strategy gives your tax-deferred savings additional time for potential growth.

Withdrawing from currently-taxable investments will likely have federal income tax consequences.  But the income may be taxed at more favorable long term capital gain tax rates, rather than at ordinary income tax rates.

Pensions & Social Security

Taking pension benefits and/or Social Security benefits early may enable you to postpone tapping tax-deferred accounts.  And the longer you wait to withdraw from tax-deferred accounts, the more time your money has to work for you without the financial drag of paying taxes currently on any earnings in these accounts.  Furthermore, depending upon your health and family history, taking advantage of these benefits early may be appropriate.

On the flip side, however, you need to determine the taxability of your pension and Social Security benefits (a portion of which may be taxable).  Furthermore, electing to take your pension or Social Security benefits early is likely to permanently reduce the periodic benefit you will receive. 

401(k)s, IRAs

The longer you wait to withdraw money from these accounts, the longer they have to potentially grow.  In fact, taking distributions too early (before age 59 1/2) will generally result in a 10% tax penalty, in addition to ordinary income tax on the gains.

Note, however, that withdrawals will be subject to tax at ordinary income tax rates, which are generally higher than long term capital gains tax rates from the sale of certain currently-taxable investments such as shares of stock and mutual funds.

Retirement Planning

Financial planning can be complex. We provide information and strategies to help you navigate the world of investing.

Learn more >