5 Guidelines For A Successful Retirement Withdrawal Tax Strategy

Now that you've saved up what you need for a comfortable retirement, the tax strategy you choose will play a big role in maintaining it. What should your tax strategy look like? While it varies for each individual investor, the most common way to minimize taxes follows a few basic strategies. Here's what you need to know about them. 

1. Take RMDs First

Required Minimum Distributions are the mandatory withdrawals from certain retirement accounts at certain times. These generally begin when you turn 70 1/2 and follow a prescribed schedule. They should never be missed — even if you don't need the money — because the penalties for failure to do so are high. 

2. Use Dividends To Fill Gaps

Taxable dividends and interest are generally taxed to you regardless of whether you reinvest the money or spend it. So you may want to go ahead and use this money to fill in the gaps in early monthly income before selling investments and paying capital gains taxes in addition to taxes on the dividends. 

3. Be Strategic About Taxable Accounts

Taxable investments can be used at any time as they usually are not bound by retirement account rules. Money you use from savings accounts, certificates of deposit (CDs), and similar cash-like assets often do not affect your taxable income. Other taxable assets generate capital gains taxes upon their sale, so these should be used strategically to offset gains with losses. 

4. Delay Social Security

If you don't need Social Security, it's generally best to wait until your full retirement date (by the agency's standards) before taking a check. Why? First, your checks will grow if you delay them as long as possible. Second, Social Security is taxed based on how much other income you bring in. Therefore, a consulting gig or taxable withdrawals can result in a bigger tax bill. 

5. Use Roth IRA Funds First or Last

Roth IRA funds continue to grow tax-free for as long as you want. How should you use them? If you expect your tax rate later to be lower than now — such as if you're still earning taxable income — use a Roth earlier for bigger tax savings. If, though, you expect that rate to be higher later (usually due to tax increases), wait until later to dip into your Roth. 

Clearly, there are many nuances to finding the right mix of capital sources to tap into when you retire. Your strategy will be unique to your own situation. The best way to find that strategy is to work with a wealth management service in your state. Together, you can use these guiding principles to create a plan that carries you comfortably into the next chapter in your life.