Consumerist had a great post last week about the order of retirement withdrawals, a post inspired by Vanguard’s recent Autumn 2007 report. The order they list is:
- Taxable accounts
- Tax-deferred accounts
- Tax-free accounts
So, why taxable accounts first? Because you want your tax deferred and tax free accounts to be able to grow as long as possible before you make any withdrawals from them. They have more momentum than taxable accounts because they either start with a larger balance (tax deferred) or they can be withdrawn without being reduced by taxes (tax-free), so both are better off than taxable accounts which have already paid taxes on the front end (they’re post-tax dollars being invested) and the back end (appreciation will be reduced by capital gains taxes).
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One response to “Order of Retirement Withdrawals”
Hmm… I’m not so sure that this is the best order. I know I’m not an expert or anything, but it seems like you might want to take some money from tax-deferred accounts along with the other two. That way you can pretty much set your tax rate. If your taxable accounts are large enough, your first years wouldn’t have any taxable income. When you don’t have taxable income, I don’t think you get exemptions or deductions. It seems like you’d want to take out enough money out of the tax-deferred accounts to use up your exemptions and deductions each year. This would essentially give you some amount of tax-free withdrawals from your tax-deferred accounts. Just my $.02 –Ed