Personal Finance
5 Mistakes People Make When Withdrawing From Retirement Accounts
Not all retirement withdrawals are created equal. The order you withdraw funds can impact taxes, RMDs and how long your savings last.
Have you considered how and when you'll withdraw from your retirement accounts? Doing so in the incorrect order may end up costing you.
Many people don’t realize how important it can be to formulate an optimized drawdown strategy.
The order in which you withdraw from your retirement accounts may impact how long your savings last, as well as your taxes, especially once required minimum distributions (RMDs) begin.
Consulting a fiduciary financial advisor can be a great first step to determining the proper order to draw down your retirement accounts. That's why SmartAsset created a free tool to help match you with up to three financial advisors.
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5 Mistakes People Make Withdrawing From Retirement Accounts
1. Not Planning for RMDs
RMDs are withdrawals you have to make from most retirement plans (excluding Roth accounts) and begin in the year you turn 73.
If you have large balances in your IRA or workplace retirement accounts, taking RMDs could inflate your tax bill, and possibly push you into a higher tax bracket.
It could be a good idea to check with a fiduciary financial advisor to see if this may be the case for your accounts and whether it may make sense to consider converting funds to a Roth account ahead of RMDs.
All of the financial advisors on SmartAsset’s advisor-matching platform are fiduciaries, legally bound to act in your best interest. If your advisor is not a fiduciary and pushes investment products on you, use this no-cost tool to find an advisor who has your best interest in mind.
2. Claiming Social Security Benefits at 62
If you want your maximum Social Security benefits, you’ll need to work until your “full retirement age,” which is determined by the Social Security Administration and dependent on your birth year.
But benefits at age 62, 66 or 67 are not your maximum monthly benefits.
Holding off until you reach age 70 could mean monthly payments may be the highest possible, increasing by 8% each year you wait.
While this strategy may help you collect the highest Social Security benefit, everyone’s situation is unique. Consulting a financial advisor may help determine how and when Social Security benefits might best factor into your retirement plan.
3. Withdrawing From Your 401(k) and IRA Before RMDs Kick In
While you can start withdrawing money from your 401(k) when you turn 59 1/2, it might be worth waiting until RMDs begin at age 73. This is time your money could potentially keep growing with compound interest.
Imagine what 14 additional years of potential growth with compound interest could mean for your retirement savings. If you have other, non-tax-advantaged investment accounts, it may make sense to begin withdrawing from those first.
4. Tapping into Your Roth Before Exhausting Other Options
If possible, it could be worth considering delaying Roth IRA withdrawals.
Since taxes are paid on contributions, any Roth IRA withdrawals won’t count as taxable income.
Your Roth IRA may also continue to grow tax-free as you tap into your other accounts. Since a Roth IRA holds after-tax funds and the IRS doesn’t need to tax it again, you also won’t need to take RMDs. This account could potentially keep growing for as long as the funds remain untouched.
5. Planning Retirement Withdrawals on Your Own
Determining the optimal sequence to withdraw money from your retirement accounts can be complicated and different for everyone. Factors like tax brackets, RMDs and Social Security may all impact your drawdown plan.
If you're unsure about how to plan your withdrawal strategy, or just want reassurance in your current plan, that’s where a fiduciary financial advisor can be invaluable.
A financial advisor may be able to help devise a custom strategy, so you can withdraw in a way that could potentially help minimize taxes and maximize the longevity of your savings. Financial advisors may also be able to adjust your strategy based on changing market conditions and your personal needs.
Additionally, fiduciaries are obligated to work in your best interest, and any conflicts of interest must be disclosed.
Finding a fiduciary shouldn't be that hard. Thankfully, now it isn't.
SmartAsset’s free matching quiz can match you with fiduciary advisors who serve your area. From there, you can compare and decide which advisor to work with. All advisors on the matching platform have been vetted through our proprietary due diligence process.
The quiz takes just a few minutes, and in many cases, you can be connected instantly with an advisor to have an introductory call.
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