In What Order Should a Retiree Deplete Investment Accounts?


As retirees start to withdraw money from retirement investments, the order of withdrawal should be given careful consideration. By carefully strategizing which investments are cashed in first, it is possible to minimize income taxes.

Required Minimum Distributions (RMD)

The Internal Revenue Service has a withdrawal schedule, starting at age 70, that must be followed by holders of traditional IRAs and anyone who has contributed funds to a 401(k) plan, a 457 plan or a 403(b) plan. There are very high penalties for not taking the required annual distribution, so if you are over 70, take this distribution first. You will be required to add this amount to your annual taxable income.

Taxable Accounts With Losses

If you had capital gains, or are required to take the RMD, sell investments that took a loss. The capital loss can be used to offset capital gains. Also, if filing as a married couple, $3,000 of the loss ($1,500 as an individual) can be used to offset ordinary income, such as from required distributions.

Taxable Accounts With No Losses or Gains

By withdrawing from accounts that you funded with money you already paid taxes on, you will minimize tax implications. Such accounts could be cash, money market funds or other types of cash investments. Check your portfolio allocation. If you are overweighted in one area, obtain cash by selling the overweighted investment, bringing your portfolio back into balance.

Other Taxable Accounts

Evaluate your investments and sell those with smaller gains to help minimize the tax consequences. Another way to make a choice between investments is to sell the one whose gains will be considered long-term, investments held over one year, as long-term capital gains are taxed at a lower rate.

Tax-Deferred Accounts

If your 401(k) plan, or other tax-deferred account, has after-tax contributions, withdraw those funds first. Then deduct your pre-tax contributions to these investments. Funds held in a Roth are tax-exempt and you should evaluate your tax situation before deciding whether to withdraw these funds. For instance, if you anticipate being in a higher tax bracket in the future, Roth funds, which are not taxable, should not be withdrawn until later.

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