If you save regularly for retirement, putting a portion of your paycheck or annual earnings into a tax-deferred investment account like a 401k or individual retirement account, at the end of your career you should have a substantial portfolio from which to draw income. But the money may live in many different investments, held within various accounts. It’s not uncommon to have several tax-favored retirement accounts, along with one more taxable investment accounts as well.
You may already be familiar with the important concept of asset allocation. Paying attention to your asset location is just as important. How and when you take distributions from each account will impact your taxes and income planning. Here’s what to think about when tapping your own retirement savings accounts for income.
Plan to Take a Set Percentage Each Year
Retirees who set a disciplined rate of withdrawal can make their savings last longer. Retirement experts generally recommend a distribution rate of about 4 percent per year, adjusted for inflation. You can use a calculator to see what that 4 percent would look like from your accounts. It may be necessary to adjust the withdrawal rate at some point. Opinions vary on annual withdrawal flexibility in the 3 percent to 7 percent range.
Prioritize Certain Accounts
The order in which you start taking money from various accounts will depend mostly on taxes.
Taxable accounts get tapped first. These include brokerage accounts, inherited investment portfolios, and any account for which you pay taxable earnings. Leave the tax-deferred money compounding for as long as possible.
Those tax-deferred IRAs and 401(k)s are the accounts to pull from next. Investors can start taking distributions from these accounts beginning at age 59 1/2.
Credits: Melissa Phipps