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- When you're planning to retire, it's smart to think about the most strategic way to withdraw money from your savings, to make sure you're optimizing your withdrawals.
- Generally, it's a good idea to start withdrawing money from your investments, move on to your retirement accounts, and delay taking Social Security as long as possible.
- For help crafting your own retirement plan, you might want to work with a professional. Use SmartAsset's free tool to find a financial planner near you »
If you’re planning to retire within the next few years, you need to consider when you should start making withdrawals from your retirement accounts.
The order in which you withdraw from your accounts is extremely important — it could let your tax-advantaged accounts grow to their full potential, make your savings last and even save you money on taxes.
1. Start with your investments
Withdrawing from your investments first gives your retirement accounts more time to compound interest.
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.
2. Move on to your 401(k) and IRA
Once you’ve exhausted your investment portfolio, move on to your tax-deferred retirement savings accounts: your traditional 401(k) or IRA.
Unlike taxable investment accounts, you won’t be charged income tax or capital gains tax as your 401(k) account grows each year.
However, you’ll owe income taxes on withdrawals. Some 401(k) plans will automatically withhold 20% or so of your account to pay for taxes. Check with your plan provider to see how your particular 401(k) works.
Are you on track to retire when you want? Find out with this calculator from our partners:
3. Wait to tap into your Roth
Put off withdrawing money from your Roth IRA 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 also will 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.
4. Stall on accepting Social Security benefits
If you want your maximum Social Security benefits, you’ll need to work until your “full retirement” age.
Benefits at age 62, 66 or 67 are not your maximum benefits. The maximum Social Security retirement benefit kicks in at age 70.
Each year after full retirement, your payout increases by a certain percentage based on specific criteria. To maximize on this strategy, we recommend holding off until you are 70 — payments will be the highest possible, increasing by 8% each year you wait.
When should you start taking Social Security? Use this calculator from our partners to find out:
SEE ALSO: 5 dumb decisions that put you at risk of going broke in retirement
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