Financial Planning Fridays #6: Account Withdrawal Order

Today we wanted to discuss something that can have a huge impact on reaching your retirement goals: the order that you take withdrawals from your investment accounts.

Many of our clients have three types of investment accounts that each have their own tax rules, after-tax accounts, IRAs/401ks and Roth IRAs.

A good financial plan for retirement should be able to model how much to take from each of these accounts each year going forward depending on the amount of income you need, your projected tax bracket and your age. This can help you to minimize the taxes that you will pay over your entire retirement and have a huge impact on how much you will be able to withdraw during that time. This planning can also help you to decide if it will be beneficial to convert part of your IRA to a Roth IRA and when to begin collecting social security.

Furthermore, this will also have an impact on the target investment allocation for each account. You generally want to keep the accounts that you plan to access first more conservative and the accounts that you plan to access in the future more aggressive.

Generally speaking, if possible within your plan, you will want to draw from your taxable accounts first to both minimize the tax impact, which opens the opportunity for Roth Conversions, while leaving your tax-deferred accounts untouched for as long as possible to allow them to grow in a tax-deferred manner for as long as possible.

In this same line of thinking, one would ideally be able to leave their Roth IRA untouched for as long as possible as this pool of money will eventually be distributed tax-free. Therefore, the longer we can allow that to grow tax-deferred and build up into a larger bucket of money to come out tax-free, the better off we will be in the long-term.

To understand how this specifically relates to your financial plan, please reach out to us directly.

In our next video in this series, we will show you a new tool that allows us to clearly show how financial decisions affect your current and long-term goals.

Be on the lookout for our next Financial Planning Fridays episode. Subscribe to our Youtube Channel so you never miss an episode. Or contact us directly; schedule your 15-minute call with us today.