Withdrawing Retirement Funds Efficiently

Very rarely will you find anyone whose retirement funds are all consolidated into a single account, as such an arrangement is difficult to manage in the first place and could potentially be disastrous. Instead, you will probably find that your retirement funds are spread across a variety of 401(k) plans, IRAs, profit sharing plans, and taxable investments. As such, you will need to tap all of these funds in a way that extends the life of these funds and reduces the amount lost to taxation.

The first funds you withdraw should come from taxable investments that were set aside for retirement since you don’t pay taxes on your principle. You will, however, have to pay capital gains taxes on capital gains, but if you have held the asset for more than a year, the tax rate is 15 percent.

Next, you should withdraw from you tax-deferred investments, which include your 401(k) plans and traditional IRAs. Withdrawing from these funds is subject to standard income tax rates, and keep in mind that you will need to start taking minimum required distributions by age 70 1/2.

Finally, hold off on withdrawing funds from your Roth IRAs until you have run out of other sources of money. The funds in these accounts grow tax free, so let them grow for as long as possible. You might even consider converting your traditional IRA to a Roth IRA after researching the benefits of doing so.

Your specific situation may always make another order of withdrawing funds make more sense, but this order allows you to get the most out of your money in most cases.

Enjoy retirement by withdrawing funds efficiently (Image: Flickr)