By Kassi Hyde, ChFC®, Wealth Management Advisor, Apollon Wealth Management
Key Takeaways:
- Withdrawal order can matter as much as the withdrawal amount
- The “golden window” between retirement and mid-70’s offers unique tax optimization
opportunities - Your three retirement buckets work differently
- The emotional shift from saving to spending is often the hardest part of retirement
- Strategic diversification across account types during your working years creates maximum flexibility in retirement, allowing you to optimize taxes across different phases of your golden years
After decades of disciplined saving, the transition from accumulating wealth to withdrawing represents one of retirement’s most complex challenges. For clients approaching their golden years, the question isn’t “How much can I withdraw?” but “Which accounts should I tap first to make my money last?”
At Apollon, we guide clients through this important decision because getting the withdrawal sequence wrong could potentially cost thousands of dollars over a multi-decade retirement. But, with proper planning, strategic withdrawals may help extend your portfolio’s longevity and reduce your tax burden.
Understanding account types
Before diving into withdrawal strategies, let’s look at the three main categories where your retirement savings are typically held.
Taxable accounts
Includes brokerage and savings accounts. These contain money you’ve already paid taxes on. When you sell securities and withdraw, you’ll only owe capital gains taxes on your gains, which is often a more favorable tax rate than your ordinary income tax bracket.
Tax-deferred accounts
Includes traditional 401(k)s and IRAs. These are the largest retirement bucket for most Americans. While your original contributions were tax-deductible, every dollar withdrawn is taxed as ordinary income. Starting at age 73 (age 75 for those born after 1960), you’ll face required minimum distributions (RMDs) whether or not you need the money.
Tax-free accounts
Includes Roth 401(k)s and IRAs. These are often the most advantageous to withdraw from since withdrawals are tax-free in retirement. No RMDs are required during the original account holder’s lifetime, making these powerful legacy planning tools.
A tax-smart withdrawal framework
Your withdrawal strategy requires looking at three phases of planning, each requiring different approaches and considerations. Let’s walk through each phase and the specific decisions you can make to save tax dollars over time.
Leading up to retirement
In the years before you stop working, we focus on creating a balanced approach across your accounts. Consider diversifying if you’ve primarily contributed to a traditional 401(k). Explore Roth options if your company retirement plan offers them or make backdoor Roth contributions if your income exceeds contribution limits.
Health savings accounts (HSAs) are also good options that offer three distinct tax advantages: tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses. HSA funds can also become retirement income sources if you don’t use the funds for medical expenses.
Focus: Diversify contributions, maximize HSA contributions, and consider years with lower income for Roth conversions.
Early retirement years
The years between retirement and your mid 70’s are a unique time. You no longer have wage income, but aren’t at the age where RMDs are mandatory. This time gives you flexibility to optimize your tax situation if done correctly.
This period can be a good time for a Roth conversion, strategically moving money from traditional retirement accounts to Roth accounts during lower-income years. By spreading taxable income more evenly over retirement, you may also reduce the taxes you pay on Social Security benefits and Medicare premiums.
Focus: Consider Roth conversions, harvest capital gains at 0% rates, and optimize Social Security claiming timing.
Age 73 and beyond
Because RMDs have kicked in at this stage, you’re no longer fully controlling the timing of your tax-deferred withdrawals, but you still have options. If you want to make charitable contributions, consider using qualified charitable distributions (QCD) to satisfy RMDs tax-efficiently, or coordinate your RMDs with other income sources to avoid Medicare surcharges. Your goal is to manage the required distributions while maintaining as much flexibility as possible through your previously set up diversified accounts.
At this stage, Medicare surcharge planning becomes particularly important since RMDs can push your income into higher brackets that trigger IRMAA (Income-Related Monthly Adjustment Amount) penalties. These surcharges can add hundreds or even thousands of dollars to your Medicare premiums based on your modified adjusted gross income from two years prior. Strategic coordination of RMDs with other withdrawals, Roth conversions, and tax-loss harvesting can help keep your income below these thresholds and preserve more of your retirement dollars.
Focus: Coordinate RMDs with other income sources, use qualified charitable distributions, and maintain flexibility through diversified account types. Watch out for IRMAA!
Navigating the emotional transition
The first year of retirement withdrawal is critical, but often the most challenging. After decades of disciplined saving, switching to spending mode can feel uncomfortable and scary. Understanding this emotional component is as important as getting your tax strategy right.
- Give yourself grace – Learning new spending patterns takes time, and shifting to this new way of life can feel counterintuitive if you’ve been a disciplined saver. Don’t be too hard on yourself as you adjust to this change.
- Create a familiar paycheck feeling – Consider establishing a monthly transfer from your portfolio to your checking account. This psychological comfort helps ease the transition from earning to withdrawing.
- Address concerns head-on – Talk with your financial advisor about your worries, like withdrawing too much or what will happen if the market drops. Maintaining proper diversification and a clear plan will help.
- Focus on learning your new rhythm – After the first year, you’ll need to nail down your withdrawal pattern to ensure your plan’s long-term success, but making adjustments early in the process is to be expected.
Your path to optimized retirement income
Thoughtful withdrawal planning requires a tax strategy to help you optimize the money you’ve worked so hard to save. With proper diversification, guidance, and a smooth transition into retirement, you can move into the next phase of life with fewer concerns.
At Apollon Peachtree Corners, we take the weight of retirement planning withdrawal off your shoulders so you can focus on enjoying the retirement you’ve envisioned. Our team stays current on ever-changing tax laws, Medicare rules, and withdrawal strategies so you don’t have to.
You’ve done the hard work of saving. Now, let us help you optimize the equally important work of strategic spending. Your future self may appreciate the potential tax savings and portfolio longevity that thoughtful withdrawal planning can provide.
by Kassi A. Hyde, ChFC® from Apollon Peachtree Corners
Apollon Wealth Management, LLC (“Apollon Wealth”) provides advice and makes recommendations based on the specific needs and circumstances of each client. For clients with managed accounts, Apollon Wealth has discretionary authority over investment decisions. Investing involves risk and clients should carefully consider their own investment objectives and never rely on any single chart, graph, or marketing price to make decisions. The information contained herein is intended for information purposes only, is not a recommendation to buy or sell any security and should not be considered investment advice. Please contact your financial advisor with questions about your specific needs and circumstances. Please visit our website https://apollonwealthmanagement.com for other important disclosures.
