How to create a tax-smart retirement withdrawal strategy (2024)

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A tax-efficient withdrawal strategy for retirement income may lessen your tax burden and help your retirement savings last longer. Here are a few factors to consider as you contemplate a retirement income withdrawal strategy that works best for your situation:

1. Your expenses

While you may have saved a fixed amount every month before retirement, withdrawing a fixed amount for income every month may not be the ideal option for retirees today. While a standard withdrawal rate of 4% annually — a popular concept for years — can help illustrate your options, a withdrawal rate personalized to your goals and changing needs may be more effective over the long term.

Costs related to your health, medical care and retirement activities, for example, will likely change year to year. We will help you re-evaluate your withdrawal amount every year, including the timing and income sources appropriate for your situation.

2. Your different sources of retirement income

As you prepare to create a withdrawal plan, it can be helpful to view your retirement income through the lens of withdrawal flexibility over the different stages of retirement. Understanding these withdrawal distinctions can help you understand your starting point for retirement income:

• Required withdrawals– Certain retirement accounts are subject to the IRS required minimum distribution (RMD) rule, which generally requires investors to take minimum distributions out of certain IRAs and retirement plans once they reach age 73. Investors who turned 72 prior to 2023 are already subject to RMDs and beginning in 2033, this age will increase to 75. Withdrawals are also generally subject to income tax. And if you don’t take the required distribution, you may be subject to a tax penalty. You can always take out more than your RMD amount.

• Automatic income– For some retirement income streams, like Social Security, you will have less flexibility over how and when you withdraw because the amount and cadence is fixed by the U.S. government based on what you (or your spouse) earned and when you claimed the benefits. The amount and cadence of pensions and annuities is dependent on your contract. Keep in mind that these benefits may be subject to federal income taxes and, depending on where you live, state income taxes.

• Optional income – The remainder of your income can be taken from other sources, like brokerage accounts and Roth IRAs. The taxation of withdrawals from these accounts varies. Roth IRA withdrawals are generally not subject to income tax, if conditions are met, while distributions from brokerage accounts are taxed depending on how long you have held the assets you plan to sell (long-term capital gains/losses vs. short-term capital gains/losses). And, qualified dividends from nonqualified brokerage accounts are eligible for reduced tax rates.

Tax rules do vary for each of these sources. We will help you develop a diversified strategy with this in mind. It may also be useful to consider consolidating accounts, where possible, to help simplify your approach.

3. Your tax situation

How you choose to withdraw assets may vary over time. For example:

• In years when your tax rate is higher, you might increase distributions from investments in tax-free accounts, such as a Roth IRA, that meet the requirements.^3,4
• In years when you have lower income, you might increase distributions from tax-deferred accounts like a traditional IRA^4,5or employer retirement plan.⁴You will pay taxes, but potentially at a lower rate. Depending on your circ*mstances you could even consider doing a Roth conversion in low tax years.
• In years when you are considering selling an asset to take a long-term capital gain, you might work with your tax advisor to see if you can take some, or all, of the gain at the 0% long-term capital gain tax rate, or, if that isn’t possible, offset your capital gains with capital losses.

With your tax advisor, we will help you estimate your taxable income by looking at your taxable income sources.

4. The current market

Withdrawing money during a bull market may not give you pause, but when the markets are struggling, it’s natural to feel hesitant about drawing down the hard-earned funds in your retirement accounts.

While the withdrawal strategy we create together is built to withstand different market cycles, it’s important to consider how current market forces impact your situation. For example, during a down market, there may be times where you may consider scaling back discretionary expenses or delay large purchases to limit withdrawals.

Create lasting retirement income

Smart tax strategies can potentially help you keep more of your money in retirement. We will work with you and your tax professional throughout the year to identify tax-saving opportunities that may benefit you.