3 Tax-Efficient Strategies for Retirement Withdrawals

It’s official – you made it to retirement! While retirement means more time to try new hobbies and adventure to new places, it may also mean that you need to tap into your nest egg as a source of income. Just like you did when you were saving for retirement, it’s important to consider the impact of taxes while planning for your retirement income. Although choosing which accounts to withdraw from may be complicated, SecurityPlus Federal Credit Union is here to propose some strategies that may help improve tax efficiency – especially when you’ve built up savings in multiple accounts.

Breakdown of how retirement accounts are taxed

What retirement strategies work for some may not work for others, which is why it’s important to first understand how different accounts are taxed - from traditional retirement accounts to Roth and taxable accounts.

• Taxable Savings Accounts
  • Examples: Brokerage and Regular Savings Accounts
  • Tax withdrawal: Capital gains tax
  • Other factors: 0% long-term capital gains when taxable income is within certain ranges
• Traditional Retirement Accounts
  • Examples: Traditional 401(k), Traditional 403(b), Individual Retirement Account and more
  • Tax withdrawal: Income tax
  • Other factors: taxed at ordinary income tax rates or potential for higher tax rates the more withdrawn
• Roth Accounts
  • Examples: Roth 401(k), Roth 403(b), Roth IRA and more
  • Tax withdrawal: Tax free withdrawals
  • Other factors: No impact on tax calculations

Retirement withdrawal strategies

Now that you understand the tax breakdown in each type of savings account, it’s important to find the right withdrawal strategy that makes sense during your retirement years. Here are three simple strategies to consider that can help make the most of your hard-earned money and minimize taxes owed.

• Traditional strategy – The most common approach of retirement withdrawal is a traditional strategy where money is taken from one account at a time. First, money is taken from taxable accounts, then from tax-deferred accounts, and lastly from Roth accounts - which are tax free. When utilizing this method, it’s important to keep in mind that midway through your retirement or whenever withdrawing from a tax-deferred account, you will encounter an increase in tax payments or “tax bump” until you begin to withdraw exclusively from your Roth account.
• Proportional strategy – For others with multiple accounts and those who estimate an even need year after year, the proportional strategy is when money is withdrawn from all accounts each year. First, you would need to determine the overall amount of retirement income needed, then withdraw from each account based on the account’s percentage of overall savings. The benefit of this strategy is that it can reduce the tax impact and potentially extend the life of your retirement income.