While we tend to focus on the total value of our retirement assets, once we start to use those assets to fund our retirement an optimal distribution strategy can minimize the impact of taxes and save you money.

There are three general types of accounts available to most retirees: taxable accounts, such as checking, savings and regular brokerage accounts; tax-free accounts, such as Roth IRAs; and tax-deferred accounts, including a traditional IRA, 401(k), 403(b) and 457. Assuming your tax rates will be the same or lower in the future, the optimal order of distribution in retirement would be:

  1. Income you receive — such as a pension or Social Security, and your Required Minimum Distributions if you are over 70-1/2 years of age.
  2. Taxable securities — securities that you have held for longer than 12 months and which have a high cost basis relative to their current price.
  3. Tax-deferred accounts — preserve the Roth benefit by distributing from the tax-deferred accounts before your Roth IRAs
  4. Tax-free accounts — depending on how much income you earn in retirement, you might want to consider converting some of your tax-deferred assets into tax-free assets through a Roth conversion.

Read this article for more information. If this strategy is best for you, we can easily incorporate it into your financial plan.