Retirement Account Withdrawal Strategies | 401ks

The retirement savings you have accumulated in a tax-deferred 401(k) or individual retirement account can’t all be used for retirement because you still owe taxes on each distribution. The timing of your retirement account withdrawals can play a big role in how much tax you pay on your retirement savings.


Consider these retirement account withdrawal strategies:

  • Take required minimum distributions to avoid penalties.
  • Withdraw funds in years when you are in a low tax bracket.
  • Convert to a Roth.
  • Incorporate charitable giving from your IRA.

Take Required Minimum Distributions

You are required to take annual distributions from your traditional 401(k) and IRA after age 72 and pay income tax on each withdrawal. The penalty for skipping a required minimum distribution is 50% of the amount that should have been withdrawn from the account.

You must take your first required minimum distribution by April 1 of the year after you reach age 72. Your second and all subsequent RMDs will be due by Dec. 31 each year. Some people take their first distribution by Dec. 31 to avoid having to take two distributions in the same year and triggering an abnormally large tax bill.

A RMD is typically calculated by dividing your account balance by an IRS estimate of your life expectancy. A spouse’s age must also be factored into the calculation if your spouse is more than 10 years younger than you and the sole beneficiary of the IRA.

“The IRS RMD tables will show how much you will be required to withdraw once the requirement kicks in,” says Brad Kingsley, a certified financial planner for Maximize Your Money in Mount Pleasant, South Carolina.

You can take multiple withdrawals from the account throughout the year as long as the minimum withdrawal amount is satisfied by the end of the calendar year. You can also withdraw more than the required minimum amount, but excess withdrawals cannot be used to satisfy the RMD for a future year.

Withdraw What Keeps You in a Low Tax Bracket

Between ages 59 1/2 and 72, you are allowed to withdraw money from retirement accounts without triggering the 10% early withdrawal penalty, but are not yet required to take distributions from the account. Some people elect to start withdrawals during their 60s, especially if they have already retired and are in a low tax bracket.

Since distributions are not required during your 60s, you can withdraw only enough to pay a low tax rate on your distributions. For example, if you want to pay a 12% tax rate on your retirement account withdrawals, you can withdraw only enough to keep your taxable income below $40,525 as an individual or $81,050 as part of a married couple in 2021.

“A planning opportunity exists once you are retired and in a low income tax bracket, but before taking Social Security, where one can take distributions from their IRA to fill up certain tax brackets,” says Austin Hon, a certified financial planner and founder of Momentum Private Wealth Management in Cedar Park, Texas. “This provides income to live on, potentially delaying Social Security for a higher future benefit, and lowers the balance of the IRA some to help manage the future RMD hit.”

Convert to a Roth

You might be able to convert your retirement savings to a Roth IRA. A Roth IRA conversion allows you to pay the income tax on your retirement savings in the year you transfer your money from the traditional 401(k) or IRA to the Roth IRA. You then won’t have to pay income tax on future investment gains or withdrawals from a Roth IRA that is at least five years old.

“Once your salary ends but before Social Security, you may be in the lowest tax bracket you will ever find yourself in retirement,” says Ryan Miyamoto, a certified financial planner and managing director of Derive Wealth in Pasadena, California. “Using Roth conversions to generate additional tax income can help fill up and capture your low tax bracket and transfer funds into a tax-exempt bucket you can then withdraw from in future years.”

A Roth IRA doesn’t have a withdrawal requirement in retirement, so the funds in the account can continue to grow until you need the money or be passed on to heirs. “The money that is converted to Roth status will continue to grow tax-free and be tax-free when withdrawn in the future,” Kingsley says. “Roth IRAs also do not fall under the IRS’s RMD requirement, so that account can be left alone potentially forever and left to a beneficiary.”

Incorporate Charitable Giving

You can avoid paying income tax on withdrawals from your IRA if you are willing to donate the money to charity. IRA owners age 70 1/2 or older can transfer up to $100,000 per year ($200,000 for couples) directly from an IRA to an eligible charity without owing income tax on the transaction. A qualified charitable distribution will also satisfy the minimum distribution requirement for an IRA.

“If this is done through a qualified charitable distribution straight to the charity, not to you first, the donated money counts toward the individual’s RMDs,” Kingsley says. “Since the money goes straight to the charity, it isn’t considered income and doesn’t need to be itemized on the person’s tax return.”

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