Withdrawal Sequencing Strategies: Excerpt from The Smartest Money Book You’ll Ever Read

Dan Solin is out with a new book, “The Smartest Money Book You’ll Ever Read,” in which he answers some of your top retirement and retirement strategy questions.

Most people have their retirement funds in various accounts—401(k) plans, IRAs, annuities, taxable accounts, and pensions. The sequence in which you withdraw funds from accounts can affect how long your money lasts, although sometimes your choices are limited. For example, you must start withdrawals from a traditional IRA at age 70 ½.

Here is the basic order in which you should tap your accounts:

  1. Post-tax accounts, which are funded with money that has already been taxed. Only the gains will be taxed, at the usually lower capital gains rate.
  2. Deferred retirement accounts, such as 401(k)s and traditional IRAs. Withdrawals will be taxed at the income tax rate that applies to you at the time.
  3. Roth IRAs, which are funded after-tax dollars. Withdrawals of principal are not taxed, neither are investment earnings once you reach age 59 ½, if the plan has been in existence for at least five years. These funds aren’t subject to compulsory withdrawals, so this should probably be the last account you tap.

Use these rules of thumb for planning your withdrawal strategy, but modify them for your situation to maximize the life of your money.

What’s the point?

When you retire, you need a plan for withdrawals so your money will last you and your spouse the rest of your lives.

Reprinted from The Smartest Money Book You’ll Ever Read by Daniel R. Solin by arrangement with Perigee, a member of Penguin Group (USA) Inc., Copyright (c) 2012.