User:Fyre4ce/Retirement draw-down priority

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Investors are faced with a variety of choices on where to withdraw money from in retirement; for example, a taxable account, a 401(k), or an IRA. Knowing which assets to draw down first will maximize return with a minimum of taxes. Retirement draw-down priority indicates the appropriate order in which assets are tapped for supplying retirement income.

Take care to ensure that any draw-down priority decision aligns with your Retirement policy statement.

Retirement draw-down priority
The order in which you may want to prioritize your sources of retirement income is shown in Figure 1, and described in Table 1 below. To use the list, begin at the top and work your way down until you have met your income need for the year. Skip over any items that don't apply. If you have more unavoidable income than you intend to spend, reinvest the excess according to your investment priority. This order is only approximate and will not apply to every case. Some exceptions to the order are discussed in the details of the list.

Adjusting income each year to keep your tax rate constant throughout retirement is an excellent approach. There are various ways to do this, and see below for detailed considerations, but this simple strategy is a good way to start, and may in fact be all that is needed.

This list is focused on meeting income requirements for the current year. Once this income need is met, there may be other tax-planning transactions (such as Roth conversions and tax gain harvesting) that seek to increase spendable income in future years.

Tapping taxable investments or retirement accounts
Often, retirees are faced with the choice of whether to sell appreciated taxable investments and generate capital gains taxes, or withdraw money from retirement accounts. When optimizing just for your own retirement, selling taxable investments first is usually best, because it leaves more money inside retirement accounts, where it will get tax-protected growth. When planning to leave money to charity, withdrawing Roth money first, then taxable, then pre-tax last is usually best, because charities pay no taxes. However, when planning to leave money to heirs, the step-up in basis for taxable investments and the ten-year stretch for retirement accounts must be considered as well. As a general trend, the longer your life expectancy, the more likely selling taxable investments makes sense compared to withdrawing money from retirement accounts.

The following tables show the which assets to draw from first (and in many cases, which to draw from second) for various combinations of the owner's tax rate and the heir's expected tax rate. The tax rates are 12%, 24%, 32%, 37%, and 50.3% with capital gains tax rates of 0%, 15%, 18.8%, 23.8%, and 37.1% respectively. Investments are assumed to grow at 8% total annual return with a 2% yield, with 90% qualified yield, and heirs are assumed to liquidate all assets after ten years. The two tables are for life expectancies for the owner of 25 years and zero. For life expectancies between the two numbers, results are roughly linearly interpolated between the two.