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The Absolute Worst Way to Withdraw From Your Retirement Accounts

Matt Wiley | FEB 7, 2019

Withdrawing from your retirement accounts in the wrong order could be a mistake worth hundreds of thousands of dollars.

The order in which you withdraw from your accounts is extremely important -- it could let your tax-advantaged accounts grow to their full potential, make your savings last and even save you money on taxes. 


The Worst Way to Withdraw From Your Retirement Accounts

1. Not Starting With Your Investment Income

Withdrawing from your investments first gives your retirement accounts more time to compound interest. If you dive straight into your 401(k) or IRA, you could cost yourself years worth of income in retirement savings.

Whether you have mutual funds, a brokerage account, ETFs, stocks or bonds, they’re all taxable, so you’ll have to pay capital gains taxes on withdrawals. Some investments also require you to pay taxes on distributions each year, like some mutual funds. 

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.

But benefits at age 62, 66 or 67 are not your maximum benefits. The maximum Social Security retirement benefit kicks in at age 70. If you claim before, you're not getting your full entitlement.

Each year after full retirement, your payout increases by a certain percentage based on specific criteria. To maximize on this strategy, we recommend holding off until you are 70 — payments will be the highest possible, increasing by 8% each year you wait.

3. Withdrawing From Your 401(k) and IRA Before RMDs Kick In

You can start withdrawing money from your 401(k) when you turn 59 1/2, but that doesn't mean it's a good idea. The law doesn't require you to start taking Required Minimum Distributions until you turn 70, so this is time your money can keep growing with compound interest.

4. Tapping into Your Roth Before Exhausting Other Options

Put off withdrawing money from your Roth IRA as long as possible.

You paid taxes up front so you can take money out of your Roth IRA and it won’t count as taxable income.

Your Roth IRA also will 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 don’t need to take Required Minimum Distributions. This account can keep growing for as long as you don't touch it.


5. The Best Way to Plan Your Withdrawals

Determining the optimal sequence to withdraw money from your retirement accounts is different for everyone, so we recommend speaking with a financial advisor.

While the value of working with a financial advisor varies by person and advisors are legally prohibited from promising returns, research suggests average additional investment returns can range from 1.5% to 4% each year. 

Voya Financial found that 79% of people who use an advisor said they “know how to pursue achieving their retirement goals.” The study also found that 59% of those who use an advisor have calculated how much they need to retire, while 52% established a formal retirement investment plan.

This new tool makes it easy to find the right financial advisor for you. Now you can get matched with up to three local fiduciary investment advisors that have all passed a rigorous screening process.

Follow these steps to get matched with the right advisor for you:

1. Simply enter your ZIP code below.

2. After you enter your ZIP code and answer questions about your financial goals, you can compare up to three top advisors local to you and decide which to work with.

3. Enjoy a better financial future!

SmartAsset - copyright 2018

SmartAsset - copyright 2018

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