In this three part series I will be discussing the importance of sequence of withdrawal – in other words, which accounts to use first for income needs.
Part 1 – Background on planning principles
In general there are three different types of accounts that you might have in retirement.
- Tax-deferred: 401(k), IRA, TSP, etc. These accounts usually have pre-tax money in, grow tax-deferred, and are taxed when the money is withdrawn.
- Tax-Advantaged: Roth IRA, Roth 401(k). These accounts are funded with after-tax money, grow tax-free, and are generally not taxed when withdrawn.
- Taxable: Investment account, Trusts, savings account, CD, etc. These accounts are funded with after-tax money, growth is currently taxable, and withdrawals are not taxable except to the extent that you liquidate an investment at a gain.
Beginning research steps for yourself or your advisor
- Review your previous tax return. Using current tax tables, determine which tax rate your income falls within. Also note how far you are away from the brackets above and below you.
- For example, if you are married and your taxable income was $200,000 you are in the 24% marginal rate and are $81,600 above the 22% rate and $71,450 below the 32% rate.
- Determine an estimate for your retirement income by year including pensions, Social Security, required distributions, capital gains, and other income. Tax projection software can be helpful.
- Take note of the differences between these two tax pictures.
Next week we will pick up with current strategies to begin implementing during your working years.
Disclaimer: Alex Voorhees and Reston Wealth Management do not provide legal, accounting or tax advice. This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified investment, tax or legal advisor. The opinions voiced in this article are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) or strategies may be appropriate for you, consult your financial advisor prior to investing. No strategy assures success or protects against loss. You should consider the investment objectives, risks, charges and expenses of any investment carefully before investing.