When it comes to taking distributions from retirement accounts, the most important concept to understand is that there’s no “one-size-fits-all” approach.
Each of us has accumulated money earmarked for retirement in different ways and in different types of accounts, so it’s critical to come up with a strategy that takes into consideration 1) how much you have accumulated and 2) where you have it.
“The point is that accumulating money is the only part of the equation.” wrote Mick Owens in his popular book, Diamond of Life: The Five P’s of success and Significance. “The distribution phase is equally important.”
What Type of Accounts Do You Have?
Mick explained that it is critical to have a comprehensive understanding of the types of retirement accounts that are in place to better understand the tax consequences of certain decisions. Some retirement accounts are tax-deferred, while others are tax-advantaged. And others may have fewer tax considerations.
When distributions are viewed with taxes in mind, sometimes the decisions can change, he explained. Account sequencing is an approach that looks at the tax status of each account and develops a strategy for the distributions that aligns with your overall financial situation.
An Inside Look
We’re not tax experts, but we are associated with companies that are. The general ideas we’re discussing are for informational purposes only. We encourage you to consult your tax professional for advice on your specific situation. Or our planning department can do a tax analysis.
To get you started thinking about the distribution phase, here are some high-level concepts that can help serve as a guide to the process. Each will have specific nuances, but the idea can begin to shape your thinking.
Withdraw a Fixed Amount:
Some people are comfortable knowing that their distribution strategy is focused on a fixed amount each month (or quarter) that is earmarked to pay certain expenses. Its simplicity can be attractive, but this approach may introduce certain risks if investments underperform for a period.¹
Bucket Your Money:
A bucket approach can help some people better visualize which assets are designed for short-term expenses and which other assets are positioned for long-term use. For example, a first bucket may hold cash and other short-term investments that can be used in the next three years. Other buckets can target different time horizons.¹
An “RMD First” Approach:
Certain retirement accounts have required minimum distributions or RMDs. For example, a traditional Individual Retirement Account (IRA) account holder must start distributions at age 73, or penalties may apply. An IRA distribution is treated as ordinary income, so it’s critical that the account owner knows how much money must be distributed.²
Another consideration is Social Security, and at what age you decide to start benefits. Benefits can start as early as age 62 or can be deferred to age 70.
While it may seem like a daunting task, it’s important to remember that there is a limited number of variables to consider when creating a distribution strategy. Our team develops distribution strategies for a wide range of clients, some with complex factors and others with more straightforward decisions.
We have illustrations that can show the pros and cons of certain decisions, and we will collaborate with you until we are comfortable committing to a strategy.