Keith,
The question you ask is important, but complicated! The answer depends on many factors including your living expenses, other assets, and Social Security status. A qualified, fee-only financial planner can objectively help you to develop a retirement income plan that optimizes your financial resources and maximizes your financial security. Generally, minimizing the total tax bill during your retirement years would be part of such a plan.
In general, it's a good idea to tap into other resources for retirement income before taking cash from a tax-deferred vehicle like a 401(k) or IRA so that you can continue to build on what you have without the impact of taxes. But that's a general line of thought. What may be right for your specific situation really depends on taking into account a number of factors already cited: living expenses, marital status, tax filing status, pension options, Social Security benefits and even the cost basis (and possible tax bite) on assets held outside of an IRA or 401(k). The mix of assets held outside a 401(k) or IRA also have an impact in determining how much of your Social Security benefits are subject to income tax. If you decide to keep working even part-time after age 66, that will also play a part in this analysis.
If you are married, you may benefit from a Social Security benefit analysis designed to find the optimal claiming strategy for you. If you can use one of the numerous strategies available, you may increase your income from a guaranteed source (Social Security) and reduce the need to draw on the 401(k) balances.
With all the talk about certain tax cuts set to expire next year, you may be concerned with the potentially higher income tax rates. But you should be equally concerned about the asset allocation you have and how well it is positioned for producing income and hedging against inflation over the duration of your retirement.
You may have heard before that you should never let the tax tail wag the dog. Taxes are an important part of the equation but it really depends on piecing these various variables together to get a clearer picture of what makes the most sense for you.
Keith - As other advisors have noted, the issues around contributions and withdrawals to and from different types of accounts are complicated and ultimately depend upon your personal circumstances. You may wish to consult with a tax advisor or financial advisor to confirm what's best for you.
In general, I advise clients to take withdrawals in the following order (subject to RMD rules): first from taxable accounts, next from tax-deferred accounts, last from tax-exempt accounts (like ROTHs). This approach is generally the most tax-efficient. You should rarely take a withdrawal before you need to, as it will accelerate the tax liability. An exception to this general rule is if you believe your personal tax rate will increase.... in which case it may make sense to time your withdrawals from tax-deferred accounts so as to minimize total tax, or said another way, to maximize after-tax total return.
I hope this helps. Please feel free to reply back with any further questions.
Another consideration involves social security. Depending on your marital situation and other factors, you may want to postpone social security until age 70. Spend your 401k plan now and accumulate more social security credits. Doing so will increase your age 66 benefit by about 130%.
Hi Keith,
You should interview different financial advisers and understand how you pay for their services. Most professionals are paid a flat rate based on the assets they are managing or an hourly rate.
Have each of the advisers create investment proposals that disclose all the costs to you. Hire the adviser you trust.
Your adviser will probably recommend rolling your 401k into an IRA because there is greater diversity of investment choices in most IRAs than in most 401ks. Moving a 401k directly to an IRA does NOT generate taxes for the client.
As my peers have stated your distributions from your rollover 401k should be coordinated with your financial needs, your other assets, and in a manner to minimize your income taxes.
Your rollover IRA needs to be invested in alignment with your tolerance for risk. Your rollover IRA needs to be allocated in a manner to endure for the remainder of your life and anyone who shares your income. Your rollover IRA is the goose that lays golden eggs.
Congratulations and have a wonderful retirement, Dave
keith, Weather you take distributions from your account now or wait for the RMD timeline has no bearing on the taxes you will pay. What has a bearing on how much tax you will pay will be directly related to how much you withdraw. There are strategies in which you can reallocate these funds so that a portion of the withdrawal will be taxed and a portion will not be taxed. I agree with alot of what Dave and Steve said above. Work with a fee for service advisor and get an anlysis review before you take any action. Best of luck, Dan
