Withdrawal Strategies: Deciding Which Account to Withdraw FromSubmitted by Mission Financial Planning on May 22nd, 2017
There are a few factors that should go into answering the question “which account do I withdraw from?”.
As advisors, we’ll think about several factors:
- the tax impact, not just in the current year – multi-year tax planning
- whether an account is under-performing,
- if there are costs to access or liquidate (commissions or surrender charges),
- how it impacts a bigger plan or goal, and
- how each of these factors plays out over the long term.
Depending on a client’s situation, the decision can have a surprising impact in the long term.
While there are generalized rules of thumb, we find that rules of thumb do not always apply to our higher-net worth clients. The answers change based on the ratio of after-tax to tax-deferred investments, the current and expected future tax bracket, and percentage of income needed from the portfolio.
We may plan on withdrawals from after-tax accounts to minimize taxes in a high-tax-bracket year, or from pre-tax accounts in a year when we can take advantage of a low-tax-bracket .
If a client has significant pre-tax (IRA, 401k) accounts, and future Required Minimum Distributions (RMDs) are expected to be higher than their living expenses, there are earlier in life ideas that could be implemented that might reduce taxes in the future.
On the other hand, if the client will be needing to make aggressive withdrawals to cover retirement expenses, the choices of which accounts to withdraw from and when to take withdrawals can add years to the longevity of the portfolio.
To consider the long-term impact of withdrawals in retirement, we use sophisticated analytical software that considers investments, other income sources, Social Security, living expenses and taxes to run multiple scenarios to optimize the withdrawal plan for each client.