How Will You Order Your Portfolio Withdrawals in Retirement?

How Will You Order Your Portfolio Withdrawals in Retirement?

EP 14. How Will You Order Your Portfolio Withdrawals in Retirement? The Retirement Rabbit Hole

As you approach retirement, you should begin taking inventory of the assets you will have available to produce retirement income. You should not only look at the dollar value of each account but also the type of account in which the assets are held. Their classification may help you determine the order when it is optimal to take withdrawals from each account.

3 Types of Retirement Savings Vehicles

The 3 Types of Retirement Savings Vehicles

There are generally three types of retirement savings vehicles; tax-deferred, potentially tax-free, and taxable accounts. You may have various assets in each account type. I will explain each account type below:

Taxable Vehicles

These include accounts such as Checking/Savings and Brokerage accounts. The principal investment is subject to taxes on interest, dividends, and capital gains as it grows.

Qualified dividends and long-term capital gains are taxed more favorably than ordinary income. The rate at which you are taxed will vary depending on your income and capital gains tax brackets.

Tax-Deferred Vehicles

These include employer plans such as 401(k)s, 403(b)s, and 457s, Traditional IRAs, and Simple/SEP IRAs. Tax on earnings and gains is paid at withdrawal, leaving the investment to grow unhindered.

When you start taking distributions from these plans, they will be taxed at ordinary income tax rates. You must take required minimum distributions (RMDs) each year from tax-deferred accounts once you reach age 72 even if you don’t need the money.

Tax-Free Vehicles

These include Roth 401(k)s, Roth 403(b)s, and Roth IRA’s. The principal investment grows tax-free and is tax-free at withdrawal if the appropriate qualifications are met.

Below is a chart breaking out the different types of saving vehicles:

Types of Taxable, Tax-Free, and Tax-Deferred Vehicles

How to Order Your Withdrawals in Retirement

As stated earlier, your personal mix of assets will be one factor in determining your withdrawal strategy. You should also consider things such as:

Maximizing Tax-Deferral vs. Estate Planning Concerns

One strategy is using funds from taxable accounts first, followed by tax-deferred, and finally, tax-free accounts. The thought behind this is by withdrawing from tax-favored accounts last, you are maximizing the time your retirement assets are growing on a tax-deferred basis.

This may not be the ideal approach if you want to leave assets to beneficiaries. This is because appreciated assets held in a taxable account generally receive a step-up in basis at your death. Assets in retirement accounts do not get this same treatment, and it may make sense, in some cases, to withdrawal from tax-deferred accounts first.

Managing The Tax Liability of Your Withdrawals

Depending on your mix of assets, you may have more flexibility to manage your tax liability. This is because annual thresholds are used to determine your marginal tax rate, the percentage of your Social Security benefit that is taxable, and Medicare Part B & D surcharges.

Having tax-free or taxable assets you can withdrawal from may help you keep your income below these thresholds in a given year.

Another way to manage your tax liability is by “filling up” your current income tax bracket by converting a portion of your traditional IRA to a Roth IRA. By converting, you’ll accelerate the taxation of your traditional IRA because you’re taxed as if you took a withdrawal equal to the amount of the conversion.

By performing Roth conversions earlier in retirement, you could potentially reduce the size of your required minimum distributions from your tax-deferred accounts. This could be beneficial since RMDs can force you to generate a greater tax liability than you would want otherwise.

Roth conversions also make your tax-free asset pool larger, which could allow for more withdrawal flexibility in the future.


There is No One-Size-Fits-All Withdrawal Approach

As with most things in retirement income planning, there is no universal best approach for taking withdrawals. Your specific circumstances should determine which approach you take and should be reassessed if/when your plans change. Having assets in all three types of accounts can prove to be a useful tool in retirement.


Feel free to email us at info@westernreservecm.com with any questions you have. If you would like to schedule time with us to discuss your specific situation click here.


Gage Paul, CFP®, RICP®, EA
Gage Paul, CFP®, RICP®, EA

Gage Paul is a financial planner at Western Reserve Capital Management. He works with the firm’s clients to create sustainable financial plans and investment strategies.

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