While you might be forced to take a required distribution from some of your accounts when you turn 72 years old, you should still come up with a plan to ensure that your savings can last you for the rest of your life—and empower you to live comfortably. Considering the tax implications and comparing various financial strategies will help you make choices for your withdrawals to ensure you make the best choices.

When Can I Start Withdrawing Money From My IRA?

You can begin withdrawing from your IRA without a penalty after you turn 59 ½. If you withdraw before you turn that age, you will pay a hefty tax penalty to the tune of 10%, unless you can get a special exception.

Special exceptions are made for things such as:

• Permanent disability
• Higher education expenses
• First-time homebuyers (up to $10,000)
• Health insurance premiums while unemployed

The minimum amount you will need to withdraw each year is considered your required minimum distribution, or RMD. You can withdraw more than this amount, but withdrawals from a traditional IRA that exceed it are considered taxable income. Withdrawing less than your RMD will result in a 50% excise tax.

With Roth IRAs, there is no RMD. Contributions are made with after-tax funds, so withdrawals are not taxed.

When Do I Have to Start Making Withdrawals From My IRA?

Generally speaking, you can start to use your IRA to fund retirement, but you will be required to take funds out starting at age 72. Roth IRAs do not require withdrawals until the account holder dies.

When Can I Start Withdrawing Money From My 401(k)?

As soon as you turn 59 ½, you can begin to take penalty-free withdrawals from your 401(k). As with an IRA, early withdrawals are possible, but you’ll pay a penalty of 10%.

When Do I Have to Start Making Withdrawals From My 401(k)?

Unless you’re under a plan that allows delaying withdrawals while you continue to work, you’ll need to start taking your withdrawals at age 72.

Retirement Withdrawal Strategies

There is no “perfect” strategy and every situation has unique factors including—but not limited to—tax brackets, net worth, expenses and age. Learning withdrawal and tax rules can help you make smart withdrawal choices that maximize the returns on your investments. Speak with an advisor to find your ideal strategy.

Start with RMDs

Your plans with required minimum distributions (RMDs) include your 401(k) and your IRA, as well as any other tax-deferred retirement accounts. If you turned 70 ½ before or during 2019, you should take your RMDs from these accounts after the Coronavirus Aid, Relief and Economic Security Act ends, though there has recently been a push to extend the CARES Act due to inflation. If you don’t start collecting RMDs after the waiver ends, you could get hit with a 50% penalty on the difference between the amount required. and that you withdrew. If you turned 70 ½ in 2020 or later, your RMDs don’t have to be withdrawn until you turn 72, due to the SECURE Act passed in 2019.

Consider the 4% Rule

The 4% rule dictates that you withdraw 4% of your savings the first year of retirement, and then readjust the percentage in future years based on inflation. Because the rule was developed many years ago, it doesn’t necessarily take into account periods of very high inflation—like what we’re experiencing in 2022—or instances where you may want to take out a little more in the first year to travel, while dialing down the withdrawal in subsequent years. That said, it might make sense for your retirement plans; the best way to determine that is to speak with a Certified Financial Planner (CFP®).

Two other rules to consider are the fixed-dollar strategy vs. the total return strategy. The fixed-dollar strategy states that you withdraw a fixed amount each year—whatever you need to live—and then reassess that amount every two or three years. That way you can raise the amount if your investments do very well, or lower the amount if the opposite happens. The fixed-dollar strategy has some of the same downsides as the 4% rule—it doesn’t bake in periods of higher inflation.

The total return strategy is riskier, stating that you only withdraw six to nine months of funds at a time, leaving the rest to invest for as long as possible. This is a strategy some people use if they have a lot invested in stocks (and can handle the higher risk of these investments). This strategy can expose your holdings to higher gains, but it can also expose them to big losses. It’s really only for investments that you’re holding for the long haul.

Tap Interest and Dividends After RMDs

After working through your RMDs, you should look at your interest and dividends from your investments. Unless your interest is coming from a tax-free municipal bond or municipal-bond fund, it will be taxed as regular interest. Your dividends will be taxed at a capital gains rate, which could be 0%, 15%, or 20%, depending on your income level, how long you’ve held the asset, and some other details. By sticking to the interest and dividends, your original investment can continue to grow and generate money.

Turn to Roth IRAs Last

Your Roth IRAs should be the last place you look for withdrawal, which you turn to only after exhausting all other resources. Roth IRAs are not subject to RMDs, and withdrawals are tax-free after you turn 59 ½, so long as you’ve had the account for five years or more.

Note: Roth 401(k)s are subject to RMDs, so you should consider rolling your Roth 401(k) into a Roth IRA. Doing so, however, might reset your five-year holding requirement, unless the 401(k) funds are deposited into a Roth IRA you already have open. If you’re unsure, schedule a free consultation with a Retirable Advisor to understand the process better and see if it’s a good choice for you.

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