Retirement Planning CI Brightworth Private Wealth

Which accounts should younger retirees tap first? Not IRAs!

Much is written on how to prepare for retirement. Save early, save often. And many retirees have done just that, accumulating an appropriate nest egg invested across a combination of 401(k) plans, traditional and Roth Individual Retirement Accounts (IRAs), personal investments and real estate.

However, at the point of retirement, a new decision set emerges. Which assets do you take withdrawals from, and in what amount and order? Under the right circumstances, the answers to these questions can have a million-dollar impact on your lifetime net worth.

By using the withdrawal strategy described below, a retiree can help achieve three key goals:

  • Make their money last longer
  • Minimize their taxes
  • Increase the amount of money available for their heirs

Here’s how the withdrawal strategy works

At the onset of retirement, many people try their best to pay for living expenses from a variety of sources, such as a pension, Social Security income, rental income and part-time work. Few have enough passive income to fully cover their expenses, and therefore need to begin tapping into their investment accounts to cover the difference.

Since many people have most of their money in traditional IRAs and 401(k) retirement accounts, it’s often the first place where they begin. Plus, it would seem to make sense: These funds were saved with retirement in mind, right?

Unfortunately, this can be a mistake. By relying on these accounts first, retirees draw too heavily on assets that generate income that is fully taxable upon distribution. Plus, these accounts have rules and potential penalties for withdrawals before age 59½.

This logic, while well-intentioned, can reduce retirement savings by several hundred thousand dollars over 20+ years of retirement. No one wants to pay more taxes and have less money for themselves and their heirs.

Instead, we recommend focusing on a two-part strategy:

  • First, withdraw funds in a way that minimizes your taxes. Consider, for example, that when you withdraw from after tax accounts first:
    • You will be taxed at a lower rate for capital gains only
    • You can select to sell the assets with lower cost bases first
    • You can do tax-loss harvesting to help reduce taxes, while preserving capital
    • You may be able to hold off on taking assets from your traditional IRA and 401(k) until you are required to (at age 72)
    • You enable Roth IRAs to continue to grow tax-free
  • Second, selectively convert portions of qualified retirement plans—IRAs and 401(k) plans—into a Roth IRA:
    • If done well, you may be able to minimize your taxes to 12%, while maximizing the amount that can grow tax-free for your heirs

 

This sound strategy maximizes the amount of wealth an individual or couple has over the course of their retirement, helping them live a fuller, more satisfying life. It also gives them more options—from traveling to contributing more money to their favorite charities and nonprofit organizations. And, of course, it allows them to provide more funds for their adult children and grandchildren.

For more information, contact your CI Private Wealth advisor today.


ABOUT THE AUTHOR

Brett Miller, CPA, CFP

Brett Miller, CPA, CFP

Partner

Brett is Practice Area Leader of the Dental Specialty and Wealth Advisor at McGill Advisors. Brett graduated from The Citadel with a degree in Business Administration (Accounting Concentration). Brett obtained his Certified Public Accountant certificate in 2008 and became a CERTIFIED FINANCIAL PLANNER™ professional in 2010. He is a member of the American Institute of Certified Public Accountants and the North Carolina Association of Certified Public Accountants.

Brett is a native of Gastonia, NC. He and his wife, Sarah, have two children and live in Mint Hill. Outside of work, Brett enjoys running, golfing, and is actively involved in his church and local Citadel alumni club.




CONTENT DISCLOSURE

This information is for educational purposes and is not intended to provide, and should not be relied upon for, accounting, legal, tax, insurance, or investment advice. This does not constitute an offer to provide any services, nor a solicitation to purchase securities. The contents are not intended to be advice tailored to any particular person or situation. We believe the information provided is accurate and reliable, but do not warrant it as to completeness or accuracy. This information may include opinions or forecasts, including investment strategies and economic and market conditions; however, there is no guarantee that such opinions or forecasts will prove to be correct, and they also may change without notice. We encourage you to speak with a qualified professional regarding your scenario and the then-current applicable laws and rules.

Different types of investments involve degrees of risk. Future performance of any investment or wealth management strategy, including those recommended by us, may not be profitable, suitable, or prove successful. Past performance is not indicative of future results. One cannot invest directly in an index or benchmark, and those do not reflect the deduction of various fees which would diminish results. Any index or benchmark performance figures are for comparison purposes only, and client account holdings will not directly correspond to any such data.

Advisory services are offered through CI Private Wealth and its affiliates, each being a registered investment adviser (“RIA”) regulated by the US Securities and Exchange Commission (“SEC”). The advisory services are only offered in jurisdictions where the RIA is appropriately registered. The use of the term “registered” does not imply any particular level of skill or training and does not imply any approval by the SEC. For a complete discussion of the scope of advisory services offered, fees, and other disclosures, please review the RIA’s Disclosure Brochure (Form ADV Part 2A) and Form CRS, available upon request to the RIA and online at https://adviserinfo.sec.gov/. We also encourage you to review the RIA’s Privacy Policy and Code of Ethics, which are available upon request.

Our clients must, in writing, advise us of personal, financial, or investment objective changes and any restrictions desired on our services so that we may re-evaluate any previous recommendations and adjust our advisory services as needed. For current clients, please advise us immediately if you are not receiving monthly account statements from your custodian. We encourage you to compare your custodial statements to any information we provide to you.