Where should you pull money from first in retirement to optimize your taxes?

Ralph Estep Jr.:
00:00

Have you ever wondered where to pull money from first in retirement, if your goal is to optimize your taxes or maybe how to effectively manage your income in retirement while reducing that tax liability? Imagine this. You've worked hard your whole life. You've saved diligently, and now you're finally ready to enjoy your golden years, but as you start withdrawing from your various retirement accounts, you're hit with a nasty surprise, a hefty tax bill that eats away at your hard-earned nest egg.

Ralph Estep Jr.:
00:31

Listen, don't let this happen to you. In today's episode, I'll share strategies that can help you keep more of your money where it belongs, right there in your pocket. Stay tuned, because today we're diving deep into these crucial questions that save you 1000s of dollars in retirement. Before we get into today's topic, let me quickly remind you about yesterday's show.

Ralph Estep Jr.:
00:57

Yesterday, we discussed essential money management tips for individuals and business owners. If you missed it or want to revisit any of our previous episodes, remember, you can find them all at askralph.com

Ralph Estep Jr.:
01:13

Now let's get to today's topic. I received a message from Bridget. She's a longtime listener who's approaching retirement. She wrote this, "Dear Ralph, I'm turning 65 next year, and I'm planning to retire. I've been diligent about saving and have money in my 401K, my Roth IRA, and I have some regular investment accounts, but now I'm confused about where to start withdrawing from. How do I do this in a way that minimizes my taxes? I don't want to make mistakes that could cost me 1000s. Can you help me understand the best approach?

Ralph Estep Jr.:
01:45

Well, Bridget, thank you for this excellent question. It's one of many people approaching retirement age grapple with and I'm glad you're thinking about it now, rather than after you started withdrawing funds. Listen, I'm a few years away from starting retirement, but trust me, I get this question several times a week in my practice, and I unfortunately got some horror stories about when people didn't plan this well and it cost them huge chunks of savings, they worked so hard to create.

Ralph Estep Jr.:
02:11

Well, let me share that with you today. Welcome to the Ask Ralph show where we master your finances from a Christian perspective. I'm your host, Ralph Estep Jr, and I'm thrilled you join me today for another tax talk Thursday. Whether you're driving to work, doing chores around the house or taking a walk, I truly appreciate you taking time to tune in and invest in your financial future.

Ralph Estep Jr.:
02:31

Before we dive into today's topic, let's start with a powerful word from Scripture. It's coming from the Book of Proverbs, Chapter 13, Verse 11 says this, "Dishonest money dwindles away, but whoever gathers money, little by little makes it grow." I love that verse. And Bridget, you've done the hard work. You've put aside that money little by little. This verse speaks directly to your topic today. It reminds us that patient, careful money management of our resources, including how we handle our money in retirement, can lead to lasting financial stability.

Ralph Estep Jr.:
03:11

The verse also emphasized the importance of integrity in our financial dealings, which aligns perfectly with our goal of optimizing our retirement withdrawals in a legal and ethical manner. The truth is this verse sets the stage nicely for our discussion on tax-efficient retirement strategies. It underscores the value of the little-by-little approach will be taken about carefully planning our withdrawals to minimize tax impact over time, rather than making those hasty decisions that could deplete our 100 savings quickly.

Ralph Estep Jr.:
03:46

Well, now let's address Bridget's question about where to pull money from first in retirement to optimize taxes. Now listen, this is a complex topic, but I'm going to break it down into manageable pieces and provide some strategies that can help you manage your retirement income while at the same time, reducing your tax liability. First of all, it's important to understand that different types of retirement accounts are taxed differently.

Ralph Estep Jr.:
04:09

Traditional 401Ks and IRAs are what they call tax deferred, meaning you'll pay taxes on them when you take the money out. Roth IRAs, on the other hand, are funded with after tax dollars. So qualified withdrawals are tax free. And then really the final thing here, what we call taxable investment accounts, are subject to capital gains taxes when you sell investments at a profit.

Ralph Estep Jr.:
04:33

So, Bridget with that in mind, here are some strategies to consider. Number one, you got to start with your required minimum distributions, or what we call RMDs. If you're 73 or older, now, that's the age as of 2024, you're required to take a minimum distributions from traditional IRAs and 401Ks.

Ralph Estep Jr.:
04:51

These RMDs are mandated by the IRS, and failing to take them results in hefty penalties. You don't want to mess this up. So if you're at the RMD Age, start here. You should sit down with your investment advisor and get a clear understanding of your RMD obligations so you have a plan set up before you get started.

Ralph Estep Jr.:
05:09

Number two, tap those taxable accounts next. After taking care of RMDs, consider withdrawing from your taxable accounts. These are your investments with after tax money instead of those pretax money investments. This is where you're going to have your long-term capital gains and are typically taxed at a lower rate than ordinary income. So, this can be more tax efficient than withdrawing from a traditional IRA or 401K.

Ralph Estep Jr.:
05:34

This strategy may reduce your overall tax burden. Listen, I got a real story here. I got a client. She, right now is sort of retiring early. She's backing down on me. She's still working, but not working full time, and what she's doing to subsidize her income is she's using these these accounts to pay on the capital gain so she doesn't have to pay that big tax burden. Let's move on to number three, and that's used traditional IRAs and 401Ks to fill up lower tax brackets.

Ralph Estep Jr.:
06:01

I'm gonna talk about that right now. So if you've exhausted your RMDs and exhausted your taxable accounts, or if you need more income than those accounts have, you could consider withdrawing your traditional IRA or 401k up to the top of your current tax bracket. This strategy is known as bracket filling, can help you control your tax liability. Now listen, this is where you truly need to enlist the services of a tax pro to help you understand the sweet spots in the tax code to minimize your tax burden, I can offer you effective tax planning to set up a successful strategy if you're in that situation, do yourself a favor and schedule a consultation with me. Just go to askralphpodcast.com/store,

Ralph Estep Jr.:
06:41

and schedule a meeting with me right now, and I will get you going on the right path. This is an area where a mistake can truly cost you a fortune. Let's get back into our list. Number four, save Roth accounts for last. Since qualified Roth withdrawals are tax free, it's often best to let these accounts grow as long as possible.

Ralph Estep Jr.:
07:02

They can be a valuable source of tax free income later in retirement, when your other accounts may be depleted. Again, this will be part of an overall tax strategy. And finally, number five, consider Roth conversions in low income years. If you have years where your income is lower, maybe you took an early retirement before you started Social Security. Consider converting some of your traditional IRA to a Roth IRA. Now you're going to pay taxes on the conversion, but it's going to be at a lower rate because of the fact you have less income, and those future withdrawals will be tax free.

Ralph Estep Jr.:
07:37

I did a show about this very topic a few weeks back, so I'm going to encourage you to check it out again. All of our shows are in the archive right at askralph.com just click on search and you'll find over 400 past shows on all sorts of financial topics to help you manage your finances. Now, let me tell you another personal story. I had a client who sold their business had a huge loss. We worked with her, and she did a ton of these IRA to Roth conversions, and it's going to save her a ton of money. She takes that money in retirement.

Ralph Estep Jr.:
08:05

Now let me share a personal experience that illustrates the importance of this strategy. A few years ago, I had a client, let's call him John. He came to me frustrated because he was paying much more in taxes during retirement than he had even anticipated. When we looked at his withdrawal strategy, we found that he was taking large distributions from his traditional IRA that was pushing him into a higher tax bracket. Was not a good plan, so we sat down together, we adjusted his strategy.

Ralph Estep Jr.:
08:33

We started with his RMDs, then tapped into his taxable accounts and carefully managed his traditional IRA withdrawals to stay within his desired tax bracket. We also did a few Roth conversions in years when his income was lower. What was the result? Well, here's the best part, John's tax bill decreased significantly that left him with more money to enjoy in his retirement. It also allowed his money to grow, since he didn't have to take as much out to cover the taxes. Think about it like this, the less taxes you have to pay, the less money you need to take out, and the more it can grow and continue to grow and provide for your retirement.

Ralph Estep Jr.:
09:08

Remember this, everyone's situation is unique, and these strategies may need to be adjusted based on your specific circumstances. You got to think about things like age, your health, other income sources like Social Security or pensions, and your overall financial goals. All of these things play a role in determining the best withdrawal strategy for you. So Bridget, here are some actionable steps you can take right away.

Ralph Estep Jr.:
09:32

Number one, take an inventory of all your retirement accounts and understand how each is taxed. It's important that you understand that. Number two, estimate your retirement expenses and income needs. Yup, Ralph's talking about creating a budget, or, as a friend just called it that I interviewed, we're going to develop an intentional spending plan. I'd love that way of saying it. Number three, consider working with a financial advisor or tax professional to create a personalized withdrawal strategy.

Ralph Estep Jr.:
09:58

Schedule a consultation with me today, if you're in this situation, I can help you. Number four, stay informed about tax law changes that could affect your retirement income. These things do change. For example, the strategy on RMDs changes sometimes. Number five, review and adjust your strategy regularly as your needs and tax situations may change over time. You can't just set it and forget it.

Ralph Estep Jr.:
10:22

So to recap, optimizing your retirement withdrawals for tax efficiency involves understanding the tax implications of the different account types you have. We got to talk about strategically ordering your withdrawals and potentially using techniques like bracket filling that we talked about and maybe doing some Roth conversions. But by planning carefully, you could potentially save 1000s in taxes over the course of your retirement.

Ralph Estep Jr.:
10:45

Well. Thank you for tuning in to today's episode of the Ask Ralph show. I hope you find this information helpful as you plan for a financially secure retirement. Remember this, good stewardship of our resources isn't just about accumulating wealth, but also about managing it wisely so we can live generously and fulfill God's purpose for our lives. Now be sure to join me tomorrow when we'll be discussing what are the top financial tips for transitioning into retirement. It's a perfect follow up to today's topic, and I'm going to provide even more valuable insights as you prepare for this important life transition.

Ralph Estep Jr.:
11:19

Well, if you found today's episode helpful. I'm going to encourage you to visit our website that's at askralph.com there you can join our community and get access to additional resources. And here's something exciting. When you join our email list, you'll receive a free copy of my book mastering your finances. Now this book normally sells for 10 bucks on Amazon, but it's yours absolutely free when you join our community and listen. Big favor to ask here. Don't forget to share this episode with friends or family members who might be approaching retirement or maybe they're already in retirement. Your share could help someone avoid some costly tax mistakes in their golden years.

Ralph Estep Jr.:
11:54

And if you'd like personalized help with your retirement planning or any other financial matters, I'd be honored to assist you. You can schedule an appointment with me by going to askralphpodcast.com/store and lastly, I want to remind you that this show is all about answering your questions. So if you've got a financial question you'd like me to address on this show, send it to me. You can send it to my email.

Ralph Estep Jr.:
12:17

That's ralph@askralph.com or if you prefer, visit our website again, that's askralph.com and click on the microphone icon at the bottom of the page, and you can record your message, your question just might be featured on a future episode. Well, thanks again for listening. Remember, my passion is to help you achieve financial success. My passion is to help you live out your dreams and grow in your faith. So as I always say, until next time, stay financially savvy and God bless you abundantly.