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The Worst Ways to Withdraw From Retirement Accounts

Withdrawing from your retirement accounts in the wrong order could cost you hundreds of thousands of dollars.

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Originally published by SmartAsset.

Being aware of these four withdrawal mistakes when prepping for retirement can help you find peace of mind and avoid years of stress; however, determining the optimal sequence to withdraw money from your retirement accounts is different for everyone, so speaking with a financial advisor is recommended.

Not Starting With Your Investment Income

Withdrawing from your investments first gives your retirement accounts more time to compound interest. If you dive straight into your 401(k) or IRA, you could cost yourself years’ worth of income in retirement savings.

Whether you have mutual funds, a brokerage account, ETFs, stocks or bonds, they’re all taxable, so you’ll have to pay capital gains taxes on withdrawals. Some investments also require you to pay taxes on distributions each year, like some mutual funds. Check with a fiduciary financial advisor to see if this is the case for your accounts.

Claiming Social Security Benefits at 62

If you want your maximum Social Security benefits, you’ll need to work until your “full retirement” age.

But benefits at age 62, 66 or 67 are not your maximum benefits. The maximum Social Security retirement benefit kicks in at age 70. If you claim before, you’re not getting your full entitlement.

Each year after full retirement, your payout increases by a certain percentage based on specific criteria. To maximize on this strategy, try holding off until you are 70 — payments will be the highest possible, increasing by 8% each year you wait.

While this strategy will help you collect the highest Social Security benefit, every situation is different. Consult a financial advisor to figure out how and when Social Security benefits should factor into your unique retirement plan.

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Withdrawing From Your 401(k) and IRA Before RMDs Kick In

You can start withdrawing money from your 401(k) when you turn 59 1/2, but that doesn’t mean it’s a good idea. The law doesn’t require you to start taking Required Minimum Distributions until you turn 72, so this is time your money can keep growing with compound interest.

Tapping into Your Roth Before Exhausting Other Options

Put off withdrawing money from your Roth IRA for as long as possible. You paid taxes up front so you can take money out of your Roth IRA and it won’t count as taxable income.

Your Roth IRA will also continue to grow tax-free as you tap into your other accounts. Since a Roth IRA holds after-tax funds and the IRS doesn’t need to tax it again, you also don’t need to take Required Minimum Distributions. This account can keep growing for as long as you don’t touch it.

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Planning Withdrawals With a Financial Advisor

If you are concerned about the most efficient way to withdraw from your retirement accounts, consider enlisting the help of a financial advisor. 71% of U.S. adults admit their financial planning needs improvement, according to a 2020 Northwestern Mutual study, but only 29% of Americans work with one.

Consider the benefits: Voya Financial found that 79% of people who use a financial advisor said they “know how to pursue achieving their retirement goals,” while 59% of those who use an advisor have calculated how much they need to retire and 52% established a formal retirement investment plan.

The value of working with an advisor varies by person and advisors are legally prohibited from promising returns, but recent research published in the Journal of Retirement suggests people who work with a financial advisor feel more at ease about their finances and could end up with about 15% more money to spend in retirement.

Finding a Financial Advisor

Chances are, there are several highly qualified financial advisors in your town. However, it can seem daunting to choose one. SmartAsset’s no-cost tool helps make it easy to find the right financial advisor for you, using a short questionnaire to match you with up to three local licensed fiduciary investment advisors in just a few minutes.

All advisors are vetted and verified through a rigorous screening process. SmartAsset confirms each advisor is registered with the U.S. Securities and Exchange Commission or the appropriate state regulator, possesses the proper licenses and has no pending or valid regulatory disclosures within the past 10 years.

Find your financial advisor match today.

Comments
  • This oft-repeated advice about not taking your Social Security at 62 or at any time before age 70 ignores some basic mathematics: Add up all the Social Security money you’ll get during the 8 years between 62 and 70, and then figure out how many years it will take the monthly difference between your age 62 and age 70 monthly payments (only the difference!) to equal out and surpass that 8 years of total earnings at the lower rate. If it takes you 15 years just to “break even”, it’s not worth it. Enjoy the lower monthly payments while you’re still relatively young.

    Reply
    • 100% agree. I started collecting SS when I turned 66; I just turned 70 and am still working full time. Every dime of SS I’ve collected has gone into savings accounts (though others would perhaps be more aggressive and put the money in investments).

      Reply
      • Robert B.

        I retired at 62 under ss disability act, financially set, paid off mortgage and any other debt i occured over the years. You start by paying the lowest debt you owe, then continue.

        Reply
    • I agree with Harv. We work for 40 plus years and many of my friends did not make it to 70 never mind to 84 or 85 which is my breakeven point if I start collecting at SS at 62. Live now as none of us know how long we really have. This has been my experienced on this journey.

      Reply
    • I agree with you, Harv. It’s not worth waiting eight years. There is no guarantee you’ll live those eight years and you gave up what could have been eight years of retirement.

      Reply
    • David A.

      I am a painting contractor who is now working only part time or when I want to as my body is wearing out a bit. Harv, I did exactly what you said as far as calculating when to take my Social Security and “break even” was indeed 15 years. I am starting to take mine now at age 63. There seams little point in waiting as the monthly SS payment covers half of my mortgage and renting out a studio apartment in my house covers the rest of it. I have not touched the stocks in my Roth IRA or inherited IRA (except for minimum required distributions) so I should be in good shape… the only concern I have is the stock market which is quite good right now.

      Reply
    • Agreed completely. It should not be “the gospel” or even close. Its a choice that is different for each person. I’m 57 y/o and I don’t plan on working past 60, working in the sense of making a good salary. I’ll do something, always, just may not make much. However, I highly doubt I make it to 80, so taking SS at 66 or even 62 makes sense for me. The other thing is if you have a decent amount in Traditional 401ks/IRA’s consider withdrawing before 72 (rmd age) because you could end up paying more taxes than you want to in your 70s. For me, I’m figuring at 60, assuming I’m not making a full salary, I’ll start pulling from my 401k to some degree relative to the current tax brackets.

      Reply
      • Great way of thinking Ben! I’m young(er) than most here (45) – and believe that i am fairly well set up with a robust 401k (in my eyes). I am eyeing a potential retirement if i can – say 55…. Using my 401k and “Rule 55”, i can withdraw from my 401k at age 55 without any penalties – AS LONG AS i retire from the company i have my 401k with (if i move to another firm, i cannot touch that 401k, as Rule 55 only applies to the last 401k that i retire from). Because i am young(er) – i am really not relying on amounts from SocSec.

        Reply
  • Linda V.

    I was told by my bank that the IRS would contact me to let me know when and how much to withdraw from my IRA. I will be 73 next week, No one has contacted me. What do I do? I don’t want to be penalized for not withdrawing.

    Reply
    • The IRS will not contact you to tell you how much you need to withdraw, they will only contact you to tell you how much you should have withdrawn, when they tell you how much the penalty is for now doing so in a timely manner. Contact your tax professional and ask them to tell you the amount, and do that before the end of each year to avoid a penalty for not meeting the RMD each year. Good luck, the responsibility is on you.

      Reply
    • Kassandra P.

      The IRS states: “You generally have to start taking withdrawals from your IRA, SEP IRA, SIMPLE IRA, or retirement plan account when you reach age 72 (70 ½ if you reach 70 ½ before January 1, 2020).” From the dates you gave, it appears your first RMD should have been withdrawn and taxes payed for tax year 2019 or 2020. A 50% penalty applies if you fail to take the RMD on time, though the IRS has authority to waive the penalty (See IRS Form 5329). The IRS will NOT contact you before the RMDs must be withdrawn, but may contact you later to assess interest and penalties. Responsible trustees, such as major brokerage firms, generally calculate RMD amounts and arrange for automatic withdrawals. I strongly advise you to seek immediate assistance to resolve this issue. I do not provide such assistance nor do I recommend specific individuals.

      Reply
  • Sir. R.

    Whats the different, at the end of every year you have to pay taxes on your pension, S.S., and 403b, 401 etc and IRA or Roth when you ever withdrawn at 70 or any age so you never really gain unless you have a off-shore account like the rich an super-rich.

    Reply
  • Robert L.

    We can work all our lives, yet if you stay in NYC we continue to have to pay taxes, on our own money that we been paying taxes on for years. Even our S.S. pension, 401B , 401 etc. We don’t receive a break even at 70 years old, its a shame in NYC.

    Reply
  • Charles F.

    When taking distributions, please be aware if the market is at a very low point. If you can wait until it recovers, then you use a smaller amount of shares to fund the withdrawal. This means that your funds would disapate more slowly and last longer.

    Reply
  • Peter k.

    I hate when people recommend that you don’t collect social security until age 70 1/2 to get the highest payout, but forget to mention that if you die early you will have lost money. To not even mention that as part of the equation is misleading people. Please supply all the facts.

    Reply
  • PETER G.

    You say that when withdrawing IRA/401K funds that you must pay capital gains tax. That is incorrect. Withdrawals are taxed as ordinary income.

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  • How about listing the best places to withdraw from first rather than those not to withdraw from. Please be specific. Investment accounts is too general. Thanks

    Reply
    • It depends on how much you have and where you have it (401k, IRA, Pension, Soc Sec, etc.). I agree with the “take from Roth IRA last” statement, although if its in risky funds you might regret that. But, blanket “rules” like “wait until age 72 to start Soc. Sec.” shouldn’t be the gospel. Also, blanket advice of “wait until the age when RMDs kick in to take out from 401ks and IRA’s”….is just plain BAD advice. Again, it depends. If you have a LOT in 401k/IRA’s and wait until 72, you’ll be paying some serious taxes.

      Reply
  • Daniel M.

    When I was thinking of retiring, my company was paying two years salary to leave, and taking your SS at age 62 the Co
    had Actuarys come in and said it would take 12 years to
    break even , now it’s 15 years

    Reply
  • Advising seniors to wait to collect SS benefits to any age after 62 is, in my opinion, the absolute worst advice you can give. Start collecting the benefit the minute you are eligible since the increase in benefit is not worth the wait. I do agree that building up some cash reserves while still working to avoid dipping into a 401K is a good idea, particularly for dividend investors since compounding will grow your income much faster than a SS benefit increase in the same time period.

    Reply
  • Kevin M.

    Everyone’s situation is different. When considering when is the right time to begin collecting SSI , you must take into your health, both physical and financial. Also consider what effect it will have on your spouse’s benefits. It is always prudent to contact a professional. As I said everyone’s situation is unique.

    Reply
  • David A.

    Yes, this is true I hear concerning the Traditional IRA’s and 401k’s but there is no tax to pay when you withdraw from a Roth IRA. That is why I switched to one many years ago. No regrets there!

    Reply
  • Waiting till 70 to collect SS is not a good idea for many people. There are many factors to consider. For example, if you have no income and need to withdraw from a 401K or IRA in order to wait till 70 for SS … you are taking money out of your 401K/IRA that could be appreciating. If you don’t have a legacy requirement (i.e. heirs that you want to have money left at your passing to give to), this also factors into it.

    Reply
  • Robert B.

    I don’t see any advice on Roth conversions.

    I started Roth conversions 7 years before RMDs will starte. My Roth conversions will cut my RMDs nearly in half. They are a critical part of my retirement plan.

    Reply

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