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Taxes and Retirement Distribution Strategies

Taxes and Retirement Distribution Strategies

| January 31, 2024

For most people, planning for retirement is centered around finding ways to accumulate the greatest amount of savings possible. But a crucial part of the equation tends to get overlooked—distribution strategies. That is, figuring out the most beneficial way to withdraw money when you retire. Taxes are one of the most important factors to consider and can derail your plan if not carefully accounted for.

 Let’s say you want or need to cover some expenses by selling assets, and your savings are in various places including tax-deferred accounts (401(k) or IRAs), taxable brokerage accounts, and tax-free accounts such as Roth IRAs. A distribution strategy can help you to find a sensible way of going about it.

At 73, you must start to take required minimum distributions (RMDs) from your 401(k) or traditional IRA accounts. So if you’re younger, it may be a good idea to begin by tapping into taxable brokerage accounts. That allows more time for tax-deferred assets to grow before you have RMDs to deal with. Tax-free accounts such as Roth IRAs may best be left alone as they don’t involve RMDs and can be left invested indefinitely.

A good first step is “tax-loss harvesting.” This means letting go of investments that have lost value and using them to offset gains. And if you don’t have any capital gains? The losses can then be used to offset as much as $3,000 of your regular income annually until you’ve exhausted all your losses. But be careful not to buy the same or similar securities within 30 days prior to or after the sale. Violation of this “wash-sale” rule can lead to your losses being disallowed.

After that, you could consider selling investments you’ve had for a year or more. You can then take advantage of lower long-term capital gains tax rates. Use whatever you need to meet your expenses and reinvest the rest. But you’ll want to hold off if you lack sufficient assets in your taxable account to cover your spending needs, or if you accumulated tax-deferred savings to the point that you could be looking at a nasty tax hit when you reach age 73 and you’re faced with RMDs. In these scenarios, you might consider simultaneously drawing down your taxable savings and tax-deferred accounts.

Tax concerns aside, when it comes to coming up with a distribution plan, it’s a good idea to monitor your spending habits or income for any changes so you stay on track to meet your expected retirement needs. Click here to use our calculator to get a rough idea of how long your withdrawals might last.

Keep in mind that retirement income comes down to three things: a plan, creating a balanced portfolio, and distributing income from various sources. As always, expert consultation is the best way to handle any financial planning or concerns. Contact us today to meet with one of our advisors for a tailored plan that fits your goals and needs.


 

Sources:

https://www.irs.gov/taxtopics/tc409

https://www.irs.gov/newsroom/irs-reminds-those-aged-73-and-older-to-make-required-withdrawals-from-iras-and-retirement-plans-by-dec-31-notes-changes-in-the-law-for-2023