Roth IRAs and Smart Retirement Withdrawal StrategiesSubmitted by Bernhardt Wealth Management on March 18th, 2019
For the last several years, Roth IRA accounts have become increasingly popular as a versatile tool for retirement savings. One reason is their flexibility. Unlike traditional IRAs, for example, Roth IRAs allow owners to take pre-retirement distributions without penalties for various purposes, including assistance with buying a first home for the account holder or certain qualified family members, disability, and certain qualified educational expenses. This may be why holdings in Roth IRAs have grown from around $78 billion in 2000 to some $660 billion by the end of 2016. It may also help explain the popularity of Roth accounts with savers ages 25–34, who are putting three times as much money in Roth IRAs as in traditional IRAs.
Another difference between Roth and traditional IRAs is that contributions to Roth IRAs are not tax-deductible. Since Roth accounts are funded with after-tax dollars, however, qualified withdrawals, even in retirement, are not taxable. For retirees, this can be a tremendous advantage over withdrawals from traditional IRAs, since many individuals are living on less income after they cease working. By avoiding taxes on the income received from their Roth accounts, they have more spendable income to use for retirement needs.
This brings up an important consideration for those in and nearing retirement. It is vital to utilize the most tax-efficient and market-savvy strategies for making withdrawals from your various sources of retirement funds. In fact, we spend a great deal of time with our clients, analyzing their various sources of retirement funds and developing the optimal method for making withdrawals.
Oddly, many people, especially those preparing for retirement, don’t consider the importance of a withdrawal strategy. After all, at this stage, most investors are focused on making sure they are putting enough money in their various “buckets” and are less concerned with how they will take it out.
But consider: the average American is expected to live between 20 and 22 years past their 65th birthday, according to the Social Security Administration. In fact, about a fourth of those age 65 today can expect to live past age 90, and about 10% will live past 95. In other words, many of us will live 30 years or more in retirement. And as time goes on, average life spans may be expected to increase. This means that we should be giving careful thought to the best ways to extend our retirement income streams as much as we can, while also paying the least possible in taxes, including the portion of Social Security income that is subject to taxation. Retirement income withdrawal strategies should consider taxable and non-taxable sources of income, along with the growth and volatility characteristics of assets in all accounts.
If you are recently retired or approaching retirement and would like to see how a smart withdrawal strategy could benefit you, a professional, certified, fiduciary financial advisor can be of tremendous benefit.