Navigating Inflation and Market Volatility: Essential Strategies for 2024
How to Determine Which Accounts to Access First
When it comes to retirement income, deciding which accounts to tap first can be a critical decision. While many people are tempted to draw from their taxable accounts first, this may not always be the best strategy. In this article, we'll discuss the importance of considering the specific characteristics of each account and the investments within them, as well as the role of tax deferral in making these decisions.
The Importance of Tax Deferral
Tax deferral is a powerful tool for retirement planning. By deferring taxes on your investments, you can earn returns that are yours to keep, effectively turning tax deferral into a loan that pays interest to you. This is one of the reasons why IRA rollovers are so popular – they allow you to keep deferring taxes on your retirement distributions and put that money to work in investments, rather than paying taxes upfront.
Creating a Cash Bucket
Before deciding which accounts to tap first for retirement income, it's essential to create a cash bucket containing anywhere from two to five years of living expenses in safe, liquid investments like money market funds, Treasury bills, short-term bonds, or CDs. This cash cushion allows you to better tolerate the volatility of a diversified portfolio and ensures that you have a stable source of income for your immediate needs.
The Downside of Tax Deferral
While tax deferral is generally advantageous, it's not without its downsides. For example, when it comes to IRAs, you must start taking required minimum distributions (RMDs) at age 70-1/2. The larger the account, the larger the distributions – and the taxes – will be. By carefully calibrating your withdrawals before age 70-1/2, you can strike an optimal balance between having enough income to live on and not paying excessive taxes.
Investments Matter
When deciding which accounts to tap first, it's essential to consider the specific investments within each account. If your risk tolerance allows it, you could turn your taxable account into a tax-deferral vehicle by investing in growth stocks and holding onto them, drawing income from your IRA instead. This strategy can be particularly beneficial if you're sitting on significant gains in stocks you don't want to sell, as it can result in a more valuable legacy for your heirs.
On the other hand, if you're more risk-averse and prefer income-oriented investments like bonds and high-dividend-paying stocks, it may be more appropriate to use the taxable income generated by these investments in your taxable account for your retirement income while letting your IRA assets continue to grow tax-deferred.
Save Roth IRAs for Last
The argument for siphoning money out of an IRA early doesn't apply to Roth IRAs due to their unique feature: no required minimum distributions at age 70-1/2. Since you never have to pay taxes on Roth money, it's best to let these accounts grow as long as possible, even into the next generation.
Stay Informed on Legal and Regulatory Changes
As new rules and legislation take effect, you may need to make adjustments to your retirement income strategy. Always consult with a financial professional to assess all your options and stay informed about any legal and regulatory changes that could impact your retirement plans.
Deciding which accounts to tap first for retirement income is a complex decision that depends on factors such as your risk tolerance, time horizon, income needs, and tax situation. By carefully considering these factors and working with a financial professional, you can create a retirement income strategy that optimizes your financial well-being and leaves a lasting legacy for your loved ones.
LynnLeigh & Company - A Registered Investment Advisor This information is provided by LynnLeigh & Co. for general information and educational purposes based upon publicly available information from sources believed to be reliable – LynnLeigh & Co. advisors cannot assure the accuracy or completeness of these materials. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. The information in these materials may change at any time and without notice. Past performance is not a guarantee of future returns.
