Which account should I draw from first, my 401(k) or Roth IRA?
When I retire I will have a pension, Social Security, 401(k), and Roth IRA as sources of income. My pension and Social Security will cover most of my living expenses, but not all. To make up the difference, which account makes the most sense to draw from first, my 401(k) or Roth IRA?
In general, if you do not anticipate needing your Roth IRA savings now or in the future for retirement income, it makes sense to leave that alone since unlike your 401k, the IRS will not require you to take minimum distributions from the Roth at age 70 1/2. Thus you will be able to let that grow tax deferred and tax free to your heirs or charity.
On the otherhand, depending on your circumstances, you may want to consider taking distributions from your Roth IRA sooner to manage your taxes in retirement. For example, in the event your 401k distribution is putting you into a higher tax bracket, or causing Social Security to be taxed, or causing your Medicare premium to go up (surcharge), consider taking tax-free distributions from your Roth IRA instead of the 401k to prevent undesirable tax consequences.
Tax management in retirement can be complicated and is often overlooked. Depending on your situation, consider consulting with a qualified tax planner.
The answer to this question can be impacted by your age as well as your personal tax situation.
When you reach the age of 70½, you are must take a required minimum distribution (RMD) from your 401(k). Your RMD is the minimum amount you must withdraw from your account each year. You generally have to start taking withdrawals from your IRA, SEP IRA, SIMPLE IRA, or retirement plan -- 401(k) -- account when you reach age 70½. Roth IRAs do not require withdrawals until after the death of the owner.
Any amounts withdrawn from your Roth IRA are not taxable.
If by virtue of your age you have to take RMDs, and the amount of your RMDs is sufficient to meet your shortfall, then you should cover the shortfall with the amount of your RMD. You can save your Roth IRA funds for unanticipated expenses. If the amount of your RMD is not sufficient (or you are not yet required to take RMDs), then you may want to factor tax costs into the equation.
You may want to take at least some of the following factors into consideration when deciding whether to take funds from your 401(k) or Roth IRA:
- You might want to take taxable distributions as long as they keep you in the same tax bracket
- What will the impact of taking larger taxable distributions be on the taxability of your social security income
- What will the effect of taking larger taxable distributions be on any Medicare premiums you may pay
If you plan to do any charitable giving, there are tax-advantaged ways to make such contributions from your 401(k), so you may want to consider this in your decision-making process as well.
If you have not yet reached the age of 70½, you may also consider using your Roth IRA to fund the shortfall and then switch to funding it with your 401(k) assets once you start taking RMDs.
If leaving money to your heirs with the least amount of taxes is a primary goal, you should spend your 401(k) down first, and leave the Roth for the last spending and possibly for your kids.
I hope you find this information helpful.
The answer to this question can be different for everyone depending on their own unique situation. There are several questions you may want to ask before deciding which account to draw from:
- Is paying the least amount of income tax important to me? If so, you will want to use your Roth IRA initially in your higher spending year, and let the traditional continue to grow.
- Is one of the IRAs heavily balanced toward one assett class? If you cannot balance both accounts according to your risk tolerance, you may want to consider (depending on market conditions) drawing from the more aggressive account as you try to decrease risk in your retirement.
- Do I want to leave a legacy to my children and grandchildren? If so, you may want to keep your Roth IRA intact and draw from the traditional.
In many cases the best strategy is to distribute a little bit of funds from both accounts. You will have to start Traditional IRA required minimum distributions in a few years after you startyour retirement anyways, so that will be part of the strategy. You can attempt to carefully allocate your distributions to keep your taxable income under higher income brackets.
As with all financial questions, it depends on your situation. In early retirement, we often spend more money doing things we are healthy enough and excited to do. You may want to take more out of the Roth in early years to have lower taxes on years where you are withdrawing more. Others would argue you should leave the Roth money alone for the longest period of time to enjoy the tax-free growth.
If a primary concern is to leave money to your heirs with the least amount of taxes, spend your 401(k) down first, and leave the Roth for the last spending and possibly for your kids.
Or, if you want a more predictable tax bill, take your spending pro-rata from both accounts each year. For example, if 70% of your money is 401(k) and 30% is Roth, take your needed withdrawals out in the proportion from each account annually.
There is no right or wrong answer, just what fits your needs and goals.
The answer to your question relies a lot upon your tax bracket when your retire. If you still had any other kind of income and or your distributions from your other retirement accounts are sizeable, you may want to start with the Roth to get the tax free income.
To get a well thought out answer, more information would need to be offered.
I hope this can be helpful!:)