6 Smart Ways to Withdraw Retirement Funds and Lower Your Taxes

Retirement Planning | Tax Planning

 Devin Ploesser By: Devin Ploesser
6 Smart Ways to Withdraw Retirement Funds and Lower Your Taxes | Plancorp
6:25

You’ve worked hard your entire career to save money, invest wisely, and plan for your future. At some point (maybe now) you enter into the next phase, living in retirement.  

If you planned correctly, it should be a breeze, right? In this article, we’ll cover 6 ways to make it even easier (and tax-efficient)! 

How you withdraw your money while living in retirement is just as important, if not more important, than how you save and invest during your career. 

Your unique situation and financial plan should dictate the optimal retirement withdrawal strategy, however there is a tactical order to consider when withdrawing assets. Let’s look at a few things to consider: 

Spend from Investments with the Lowest Tax Rate 

This is the obvious first step to take when you need to pull money from your account because it will reduce your total tax liability. However, some factors can alter the order of your withdrawals.  

These include your expected spending at various stages of retirement, your estimated income and tax liability, insight on whether withdrawals from your various retirement accounts will be taxable, and your expected income fluctuation over time.

Keep a close eye on your tax bracket year by year to get all you can without paying more tax. Find out how tax projections can be a great tool to help you reduce your tax liability.  

Follow the Required Minimum Distribution (RMD) Rules 

Current laws require required minimum distributions (RMDs) from IRAs and other retirement plans to begin at age 73. The starting age will jump to 75 effective January 1, 2033, barring any changes before then.  

With RMDs not required until you’re 73, it hopefully affords you a few extra years of tax-deferred growth before you need the funds.  

A good thing to keep in mind: RMDs are only required for traditional, rollover, SIMPLE, and SEP IRAs, most 401(k) and 403(b) plans, most small-business accounts (self-employed 401(k), profit sharing plans, and money purchase plans. 

If you don’t take RMDs at the required age, you could face issues such as the excess accumulations penalty. This means you’d pay a penalty of 50% excise tax of the RMD amount for the year(s) you failed to take your required distributions.  

Even having the correct RMD amount is important. RMDs are calculated based on total applicable accounts balance. You can take all of the RMD from one IRA, or divide it among several.  

What matters is you withdraw the entire required amount based on all applicable accounts. This can get complicated, so we recommend consulting with a wealth manager to be sure you are taking the distribution from the optimum account(s) based on your individual plan and investments. 

Consider Partial Roth Conversions 

If you drop to a lower tax bracket one year but know you will be in a higher bracket in the future, a partial Roth conversion is a good strategy 

In this case, you would pay taxes on the IRA withdrawal at a lower rate now than you would in the future—and any future gains in the Roth aren’t taxed.  

A quick review of tax rates and any proposed tax rate increases should be considered when looking at Roth conversions. You’ll pay taxes as if it were ordinary income when doing a Roth conversion, so you need to be mindful that it doesn’t push you into a higher tax bracket by doing so.  

Remember, too, that you can make small Roth conversions over multiple years. Just remember to avoid some common mistakes, such as paying the conversion taxes with IRA funds or holding the wrong assets in your Roth account. 

Donate to Charity 

If you’re charitably inclined, you can leverage qualified charitable distributions (QCDs) and donor-advised funds (DAFs) to decrease your taxable income. This allows you to take an even more customized approach when withdrawing your retirement assets. 

If you own an IRA and are 70 1/2, you can contribute up to $105,000 to charities without paying taxes as part of the QCD program. If you put money in a DAF, it will grow tax-free in a variety of investments (similar to the money put into an IRA). As it grows, you can decide when and how you’d like to donate that money. 

Make In-Kind Withdrawals for Your RMDs 

If you don’t want to take RMDs as cash, you can make in-kind distributions from your IRA. This means stock from your tax-advantaged retirement account can move to a taxable investment account (e.g., a brokerage account) without any need to liquidate shares first. Even better, in-kind distributions can potentially lead to capital gains in the future. 

There are several reasons you might decide to make in-kind withdrawals. The market could have taken a downturn, you may have decided to hold onto a particular stock, or you just don’t need the cash right now.

No matter the reason, you should discuss your situation with your wealth manager before making any final decisions. And keep in mind, the total amount of in-kind withdrawals is still subject to taxes, and you will be obligated to pay that when taxes are due.  

Make the Most of Your Health Savings Account 

For those medical expenses that are bound to pop up during retirement, a health savings account (HSA) allows you to withdraw the funds you need.  

What’s more, if you kept previous receipts from non-reimbursed health expenses, you can also withdraw funds in those amounts. These withdrawals are tax-free, unlike those from an IRA or 401(k).  

The primary age limit for contributing to an HSA is 65, however if you retire early, you can continue to contribute to an HSA as long as you meet a few requirements: 

  1. You cannot be enrolled in Medicare 
  2. You're covered on a high-deductible health plan 
  3. You're not a dependent on someone’s taxes 

Everyone has different withdrawal needs, and the process can be simple or very complex. The more complex your nest-egg, the more essential it becomes to work with a trusted wealth management team to maximize your opportunities.  

Curious if it’s time to get a wealth manager on your team? Our 2-minute financial analysis will offer insights into four key areas of your financial plan, curate resources just for you, and suggest if it may be beneficial to work with a professional. 

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With a passion for helping individuals and businesses reach their financial goals, Devin serves as the Client Development Manager at Plancorp Wealth Management. He specializes in building and maintaining strong client relationships, understanding each client’s unique needs, and ensuring they receive tailored, comprehensive financial planning solutions. Devin's approach is rooted in trust, transparency, and a deep commitment to empowering clients on their financial journey. More »

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