![]() ![]() Once you reach age 70, you generate part of your income by filing for Social Security, and this cash flow lessens the withdrawals you need to take from your other accounts. Any additional needed cash flow would then come from your after-tax assets, such as your investments. Here’s how a typical order of withdrawal strategy might work. At retirement, you start withdrawing from your IRA until your taxable income is a few dollars below your next marginal tax bracket. The ordering of withdrawals is where efficiency can be maximized. It’s not just a matter of setting up your withdrawal schedule on the date you retire and then going on autopilot. An efficient order of withdrawals is a lifetime aspect of drawdown strategies. This helps delay taxes on higher taxed assets.ģ. In other cases, you may put your least tax efficient assets in your tax-deferred accounts while keeping your tax efficient assets in your taxable accounts. This helps avoid taxation on potentially high yielding assets. Portfolio efficiency involves locating the right kind of asset in the right account to leverage these attributes.įor example, you might place higher expected return assets in your tax-free account while locating lower expected return assets in your tax-deferred accounts. Finally, some assets have growth potential (e.g. IRAs), and yet others are after-tax (e.g. Roth IRAs), while others are tax-deferred (e.g. At the same time, some retirement accounts are tax-free (e.g. tax-exempt bonds), and some are tax inefficient (e.g. This involves the juggling of three factors in such a way as to maximize the overall after-tax efficiency of retirement capital: the tax status of accounts, the tax status of assets, and the growth potential of assets.
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