Depending on your retirement assets, the process of withdrawing funds can be either fairly simple or very complicated.
The complicating factor is taxes. Your goal is to pay the least amount in taxes so that you will have more for retirement.
Many people will have multiple sources of retirement funds to draw on, such as:
- Company pensions and other defined benefit plans
- 401(k), 403(b) and other defined contribution plans
- IRAs (regular, Roth and others)
- Tax-free accounts (bonds and so on)
- Taxable investment accounts (stocks, bonds, mutual funds and so on)
- Social Security
Many people begin with those investment accounts that will generate a tax bill upon withdrawal. Profits from many of these accounts may fall under the long-term capital gains rules, which mean profits are taxed at 15% (always check with your tax advisor as all tax rates are subject to change).
The next source is your retirement accounts, but be careful since there are rules for withdrawal. Some accounts will be taxable at personal income rates, while others may fall under a different set of rules.
The tax code is extremely complicated and when you combine a variety of retirement accounts the process of finding the most tax efficient withdrawal schedule becomes even more confusing. Common sense is not always a good guide when it comes to tax planning.
If you have several different types of retirement accounts mixed with regular investment accounts, you face a daunting task.
Your best strategy is to find a qualified tax advisor to help you lay out a plan for tapping your retirement accounts. Begin this process at least five years before you plan to retire. Tax laws change, so updating may be necessary.
It does make a difference how and when you begin withdrawing funds from your retirement accounts. Expert advice will be money well spent.