Making withdrawals from retirement accounts can backfire.
Funding a retirement account when you are employed should be prioritized.
By saving in your retirement accounts, you will have money to withdraw in retirement.
These retirement savings become a significant source of income when your are in your golden years.
According to a recent Smart Asset article titled “The Worst Way to Withdraw From Your Retirement Accounts,” how you make these withdrawals will impact your taxes and income in retirement.
What strategies should you avoid?
Bypassing Your Investment Income.
By waiting longer to make withdrawals from your retirement accounts like your IRA and 401(k), you will allow these accounts to further accrue tax-deferred interest.
This means you could lose significantly on compounded interest over the years.
Instead, you can start with non-tax qualified investments like brokerage accounts, ETFs, mutual funds, stocks, and bonds.
Although you can expect to pay capital gains taxes on these or taxes for distributions, you will not be forfeiting compounded interest.
Claiming Social Security Benefits at 62.
Although you can start taking Social Security at age 62, you will be settling for a smaller distribution the rest of your life.
To maximize your benefit, you should wait to claim until age 70.
If you cannot wait until age 70, delay as long as possible.
Every year until full retirement age, your benefit will increase by 8 percent.
Withdrawing from Your 401(k) and IRA Before RMDs Start.
At age 72, you must begin taking required minimum distributions from your retirement accounts.
Although you can begin taking withdrawals without penalties when you turn 59½, it is wise to wait until you are required by law to take distributions.
You can improve your financial security by allowing your IRA and 401(k) to accrue more interest.
Using Your Roth IRA Funds Prior to Exhausting Other Options.
Because Roth IRAs are funded using after-tax dollars, withdrawals from these accounts are not taxable as income.
By waiting to make distributions, you will maximize your compounded interest.
There are no Required Minimum Distributions levied on Roth IRAs.
This means you can let these funds grow untouched for as long as you are able.
Working with an experienced financial advisor will benefit you as you evaluate your assets and how you want to use them in retirement.
As with dancing, timing is everything.
Reference: Smart Asset (July 20, 2021) “The Worst Way to Withdraw From Your Retirement Accounts”