You have been diligently saving in tax-deferred accounts for years and you finally have enough squirreled away to fund your retirement. But we need to discuss the elephant in the room. You have a looming tax burden that if not handled correctly can really mess up your retirement plans. On this episode, I’m going to teach you how to come up with a withdrawal strategy to help you fund your retirement. Are you ready to learn how to withdraw from your retirement accounts without Uncle Sam getting more than his fair share? Then listen to this episode of Retirement Answer Man to help you plan your retirement withdrawal strategy.

The looming tax burden

Your money has been growing tax-deferred year after year. This is a great way to get you to save for retirement, but now it’s time to pay the piper. Do you know what your tax liability is? If you have $1 million in tax-deferred accounts and you take it all out in one year then you’ll have to pay 30% in taxes. Your million dollars just shrank to less than $700k. The good news is that you can minimize your tax liability in how you withdraw from your accounts. The great thing about retirement is that you have more control than ever in deciding which tax bracket you will fall under. You can manage how much you take out and where that money comes from.

You need to be more tax aware than ever before

How do we take advantage of the tax system to maximize the amount of money that we put in our pockets? Early on in retirement is when you start to think of spending in big ways. You may want to buy an RV or a vacation home or remodel your current home. Many people spend on these extraordinary expenses with little thought as to how they should withdraw the money for these projects. You want to be aware of the tax brackets when you decide how you withdraw your income. Thinking about tax strategy is not nearly as exciting as when you think about investment strategy. It’s not glossy and sleek, but having the right tax strategy is even more important at this point in your life and having the right strategy to fund your retirement can save you thousands of dollars down the line.

What are your income sources in retirement?

There are usually 3 sources of income to fund your retirement. There is social capital like pensions and Social Security. Next, you have human capital, which is the income that you may earn in pretirement. Lastly is financial capital or the money you have saved in various accounts. Your financial capital is then broken up into 3 categories. The money you have already paid taxes on, money from tax-deferred assets (401K’s and IRA’s), and tax-free assets (Roth IRA’s). You have to have a strategy on how to manage all of these buckets of differently taxed assets. Having the 3 buckets gives you some flexibility on how to pull money out of these accounts.

What can you do to frame your withdrawal strategy to fund your retirement?

Retirement tax strategy can get really complicated. That’s why it is so important to have a plan. Follow these steps to help you minimize your tax burden.

Know your income sources. Figure out what your social capital, human capital, and financial capital are and identify where you have control.
Know your planned spending. This sounds simple but you should understand the sequence of your spending and plan for the lump sum expenses. Decide how you will pay for them.
Model how to find tax equilibrium. You need to look at your tax bracket and plan year by year.
Think about where to put your investment assets.
Think dynamically to stay agile and flexible each year.

OUTLINE OF THIS EPISODE OF THE RETIREMENT ANSWER MAN HOT TOPIC SEGMENT

[2:20] That looming tax burden
[6:33] Be aware of your tax bracket as you withdraw your income

PRACTICAL PLANNING SEGMENT

[9:25] A correction from a previous episode
[10:53] Have a withdrawal plan
[16:45] RMD is waiting for you
[19:02] The ACA adds another element of complexity to your withdrawal strategy
[23:12] What can you do to frame your withdrawal strategy

THE HAPPY LAB SEGMENT

[26:02] Human connection is awesome to see

TODAY’S SMART SPRINT SEGMENT

[28:05] Outline how you will withdraw money in your first 2-3 years of retirement

Resources Mentioned In This Episode

Rock Retirement Club

Roger’s YouTube Channel - Roger That

BOOK - Rock Retirement by Roger Whitney

Work with Roger

Roger’s Retirement Learning Center

The Retirement Answer Man Facebook Page