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Retiring before 59 1/2? Don't pull money from the wrong accounts.
Retiring before 59½? Which account should you pull income from first? The answer usually isn't just one account. A common rule of thumb is to spend down your brokerage account first, then move to Roth, and leave your IRA and 401(k) alone as long as possible. Finish one, then start the next. That sounds simple. But, it can also set you up for a much bigger tax bill 10, 20, or even 30 years down the road. A better approach is to look across your brokerage, Roth, and IRA/401(k) accounts together and coordinate a blended withdrawal strategy from each over time. Remember that the goal isn't necessarily to pay the least tax in Year 1. It's to build a more thoughtful strategy that manages your overall tax impact over your entire retirement. Here's what you need to be thinking about and model out: Brokerage accounts have no age restrictions, but gains and dividends can still create taxes. Roth IRA contributions can generally come out tax and penalty free, while earnings have additional requirements for tax-free withdrawals (generally age 59 ½ and 5 years). Traditional IRA and 401(k) withdrawals are taxed as ordinary income and usually come with a penalty before 59½, though the Rule of 55 may open up penalty-free access to the 401(k) of the employer you separated from if you leave that job in or after the year you turn 55. That’s a little known option that creates some more flexibility. Once you know what each account allows, you can build a withdrawal strategy that helps manage your tax bill over time instead of letting it pile up later. Because if you wait too long to touch those IRA dollars, required distributions in your 70s could force more taxable income onto your return than you actually need and potentially increase your lifetime tax bill. If you're a few years out from retirement, this is math worth doing before you take your first dollar out. If you want help running those numbers, send me a message. Happy to walk through it. #RetirementPlanning #TaxPlanning #EarlyRetirement #FinancialPlanning
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