Tax Efficient Retirement Withdrawal Strategies

There are tax-efficient ways to withdraw money for retirement and tax-inefficent ways. 

However, there are many things to consider and there is not a one size fits all answer.  Some retirees have adequate income from pensions and Social Security, and do not need a fixed withdrawal from thier portfolio.   Others have no income from pensions and depend on their portfolio for the majority of their income.

After using Social Security, and any pension or annuity payments and RMD's from your traditional IRA for living expenses, the least taxing way to withdraw money is in the following order:

1. Taxable Accounts - Since any money you receive from taxable interest, dividends or capital gains is taxable anyway, spend that money first.  If you still need more, withdraw principal from your taxable account.  If you believe you will need principal from your taxable accounts, keep enough money available in liquid money market funds or very short term bond funds to last a year or more.  That avoids being forced to seel stocks or stock mutual funds during a down market.

2. Roth IRA - Since money left in a Roth IRA build up tax-free until withdrawn and has no RMD requirement, it is the most tax-efficient source of capital that you have.  However, most taxpayers should us the money in a Roth IRA as a safety net rather than as a regular source of retirement income.

3. Tax-Deferred Accounts - If you do not have adequate assets in your Taxable Accounts, take a distribution from your traditional or rollover IRA. 

Potential Future Tax Law Changes

Keep in mind that this information is based on current tax laws, which can change.  It is important to stay abreast of changes that may affect you, or use a knowledgable tax advisor.