The Best Retirement Withdrawal Strategies

The Best Retirement Withdrawal Strategies

Let’s talk retirement it’s time to enjoy all  those bucket list items that you didn’t get to do   have some additional income streams like  annuity or some rental income but now that  your paycheck will soon be turned off how   during retirement well this is a complex   question and every situation is different but  if

You stick with me i’ll explain the optimal   it’s colin exelby here and i provide financial  planning for business owners and their families   i’m the owner of a virtual financial advisory  i provide advice to families all over the country  part of that advice is retirement income planning   into the most efficient retirement

Income stream   possible numerous studies have shown that with  a little thought preparation and analysis you   can extend the life of your portfolio increase  your distribution rate or pass on more wealth to   your heirs i’m going to talk about withdrawals  from three types of accounts taxable accounts   now taxable are

Non-retirement accounts where   you’ve already been taxed and your only taxes  would be capital gains when liquidating assets   and you will owe income taxes when you  are typically traditional or rollover iras sep or  simple iras 401(k)s or 403(b)s all right tax-free   gains or income taxes when you distribute them   these

Are typically a roth 401k or a roth ira  account where contributions were initially taxed   when you would draw them as long as the   okay the first step to figuring out how to  distribute assets is to figure out how much   you need annually to live on after taking into  account any other income sources so what do you do  

After taxes of course and then subtract   like social security pensions rental income   amount that’s needed for retirement withdrawals   made from a combination of those three types of   accounts the goal of retirement income planning is  to maximize after tax distributions you want to be   mindful of your tax brackets

Throughout retirement  and both at the federal and the state level   distributions from retirement accounts or pensions   if you are considering a move in retirement a  state without retirement income taxes could be a   major help to your portfolio nine states don’t  currently levy any state taxes and another   alabama

Taxes 401(k)s and iras but doesn’t   tax pensions for a list of states that don’t tax  retirement income just check out the notes below   all right to analyze your federal and state income  tax rates the first step is to project your income   tax rates taking into account tax credits and   deductions ideally you want to be

Very mindful of  the points where the tax brackets jump up there   are certain income levels where the marginal tax  rate increases meaning your retirement income is   much total income you have all right let’s   take a look at five strategies for withdrawing  assets and who might typically use them for each   of these

Strategies it’s important to know the age  limitations and withdrawals and whether penalties   for early withdrawals is the worst strategy the   government created these plans and gave incentives  for you to save for retirement don’t blow up these   benefits in early withdrawal penalties if you  need distributions prior to the

Appropriate age   there are additional strategies that may limit  the impact of those penalties let’s dive in   baseline income strategy it typically is the least   tax efficient but often it’s the easiest one to  employ it’s called pro rata and means that you   your tax deferred and your tax-free accounts   after your

Other income sources have been used the  pro rata strategy would be to take two thousand   tax deferred account and your tax-free account   if your investment strategy is to hold the exact  same asset allocation in each type of account then   as you would draw assets your asset allocation  stays consistent over time the assumption

Is that   by withdrawing equally from each type of account  you diversify your tax burden over time this   strategy is ideal for someone who would not change  marginal tax brackets based on distributions on   the surface this isn’t a bad strategy if you don’t  know what to do don’t wish to do deeper analysis   assets

Strategy number two i’m going to call   this the taxable pro rata this means distributions  are funded with the taxable account first until it   and the tax-free accounts this strategy typically  keeps tax rates lower in the early years because   gains from the investments not any principal   distributions from the retirement

Accounts this  also allows the tax deferred and the tax-free   accounts to grow without taxes for a longer period  of time this strategy could be ideally employed   smaller retirement accounts the downside with this   strategy is that you may be exchanging lower tax  rates now for future taxes at much higher rates  

Are and what the heck future tax rates are   all right strategy number three is to use tax  deferred accounts first followed by the taxable   aims to keep the tax-free assets growing   as long as possible and more evenly spread the tax  obligation over time typically in the early years   of retirement or if you retire early

Your income  levels are much lower than while you were working   using tax deferred assets first capitalizes on  the fact that while your income is lower usually   before mandatory retirement distributions take  effect and potentially before receiving social   be taxable and still stay in a lower marginal   someone who

Retires early with a large amount in   tax deferred retirement assets like in the ira or  401(k) and having smaller amounts in taxable and   tax-free accounts especially if those assets are  invested in higher growth areas it allows those   assets to grow for a longer period of time before  liquidation and then liquidation could be

At lower   tax rates strategy number four is to distribute  taxable assets first then tax free assets   and finally tax deferred assets this strategy  is designed to defer the largest amount of tax   for as long as possible and this strategy would  be ideal for someone who either has a shorter life   expectancy maybe due

To some medical condition  or some family issues or someone with a larger   taxable assets first of course you only pay   income taxes from tax deferred distributions   be distributing them at all before passing away   first then tax deferred and finally tax-free   retirement income strategy and intuitively it  

Makes sense especially if your asset allocation  is aligned meaning your investments across the   different accounts are aligned first allow your  tax-free roth assets to grow as long as possible   you’ll want to distribute all your taxable assets  first where only capital gains taxes are paid   you next would withdraw all your

Tax deferred  assets this is when you would most likely be in   your highest marginal income bracket in retirement  and finally when all of those other assets are   gone then you distribute your tax-free roth assets  this strategy would be ideal for someone with   assets to their heirs because tax-free roth   to pass on

Because of their tax-free nature   the problem with this strategy is that in your  early retirement years when your income is   often the lowest you’re not taking advantage of  those low marginal tax rates you often end up in   much higher tax brackets than needed in the years  so what’s the ideal strategy in my opinion the 

Ideal strategy is to be fluid not rigid look tax   rates change your distribution needs change we all  make assumptions but we don’t know what’s going to   happen in the future and market conditions change  i’m a big believer that maintaining flexibility   makes a lot of sense in my experience retirees  often spend the most in

The early years of   retirement you do all those things that you wanted  to do and you didn’t have the time and you pay   a lot of expenses in the later years when health  care costs are significant both in the home and if   you need additional care the years in the middle  are often when you have lower spending needs  

Because retirement spending isn’t often a straight  line your withdrawal strategy should reflect those   changing needs i firmly believe that based on much  analysis that attempting to maintain a consistent   than lower and then higher later on makes a lot   of sense the most tax-deferred assets that you  can distribute in the early

Years of retirement   at lower tax rates the better even if you don’t  need the assets right away they could potentially   be reinvested in tax-free roth accounts through  a conversion or in a taxable account where only   the capital gains taxes would be due or maybe  some combination of both this is a strategy that  

Many people miss out on i see it all the time they  miss out due to the desire to delay taxes as long   as possible and this creates potential tax bonds  in retirement accounts and if tax rates increase   in your retirement you could be in for a rude  awakening these are the most common distribution   strategies but they’re not

The only ones every  family situation and their needs are different   advice thankfully nowadays powerful financial   planning software exists to examine each of these  strategies as it relates to your own situation   and determine the best course of action currently  in my practice i use some incredible software  

With my clients if you’re getting close to   retirement and wish to analyze your withdrawal  strategies feel free to reach out to me at my   website or speak with your trusted  advisor if you enjoyed this video just hit that   little like button and make sure you smash that  subscribe button so you’re notified

Whenever i   produce a new financial planning video and youtube  loves engagement so you really help the channel   like to add please do so in the comments below

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