Preserve Your Wealth by Drawing Retirement Money From Taxable Accounts First

When speaking about taxable accounts, I am referring to those accounts into which you deposited money after taxes. Personal accounts like checking and savings fall into this category. There is no tax advantage to having these accounts, as dividend and interest earnings are taxed annually. So, the term taxable account, applies to these sorts of accounts, for which there has been no tax deferment.

It is better to withdraw from these types of accounts for living expenses, etc. in retirement. This will help sustain the wealth in your tax-deferred accounts and allow them to continue growing.

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If you did not have to withdraw money from either your taxable or tax-deferred accounts for retirement, your tax-deferred accounts would grow more quickly than the taxable accounts. That is because of the rate at which the tax-deferred accounts compound. However, if you have to withdraw from those accounts, you lose part of the return.

Preserve Your Wealth by Drawing Retirement Money From Taxable Accounts First

Your taxable accounts will deplete themselves slower than your tax deferred accounts, because only the interest or dividends is taxable. The majority of what you withdraw from your taxable accounts is after tax money and not subject to being taxed again. All of the money that you withdraw from your tax-deferred accounts is immediately taxable.

When you withdraw expense money from your tax-deferred accounts, you have to withdraw more than the expense amount because some of it will be eaten up in taxes. Withdrawals from your taxable account can be done in the specific amounts you need for expenses since none of the withdrawal is taxable. So the taxable account runs down slower than the tax-deferred account.

When you withdraw money from your tax-deferred account, you are withdrawing funds the interest will use to compound; therefore, you are stunting the growth of your taxable account in addition to depleting it.

If your tax-deferred account requires that you withdraw a specific minimum, only withdraw the minimum and use your taxable accounts to offset any additional expenses.

When living off of your retirement accounts, you should speak to your financial advisor in order to determine the nature and amount of your expenses. In this manner, you can set up a planned series of withdrawals from your accounts in order to cover your living and miscellaneous expenses while maintaining the wealth of your tax-deferred accounts. This will help you to enjoy your retirement years without unnecessarily depleting your personal wealth.

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