Episode 53: How Do I Spend My Retirement Savings Without Triggering a Tax Penalty?

Published: October 3, 2021 | Updated on: October 1, 2021

Thank you for joining us for episode 53 of our Money Wisdom Question Series. Today’s question is, “How do I spend my retirement savings without triggering a tax penalty?”

Tax Planning is a Huge Part of Retirement Planning

It’s not just about how much money you have, but also where it makes the most sense to take that money from once you retire. The general rule, under normal circumstances, is you don’t want to spend your retirement money before the age of 59 and half. I say, general, because this is not everyone, but it’s most everyone. You really don’t want to access the money in your 401(k), IRA or Roth before you retire, because that’s money you’ve saved in order to provide for you in retirement. If you spend it before retirement, you can see the problem with that. You have to be mindful as you go to draw money out of these accounts to make sure you’re using tax-efficient strategies.

Are You Taking Money Out of the Right Accounts?

It’s important to look at this question from both an investment standpoint and a tax standpoint. It’s enticing sometimes to pull money out of a Roth since we don’t have to pay any taxes on it, but usually that’s a mistake. Taxes are probably going to increase with time, and every dollar that you make in a Roth you won’t have to pay taxes on later, either. You really want to let that money grow as long as possible and it’ll benefit you in the long term.

With a traditional retirement account, where you pay taxes on all of it as you draw it out, again, our taxes are probably going to increase. Is that account going to grow? Hopefully. But, maybe it makes sense to spend that money earlier and pay taxes on it now to avoid potentially paying higher taxes in the future.

Takeaways

It’s not just about how much money you have invested or how it’s invested. In terms of Social Security, most people are going to pay taxes on some of it. Again, some people are going to get penalties because they draw from it early or they access that retirement money the wrong way. It’s important to have these conversations and get input. It’s not just “do I have enough money”, but you need to consider:

  • Are we thinking the right way?
  • Do we have the right plan?
  • When we do draw that money out, how do we keep as much of it as possible?

Thanks for joining me and I hope you found this information helpful!

P.S. If you enjoyed this topic and want to learn more, download your copy of our digital offer, “Tax Strategies for Retirement: Buckets Create Tax Choices”.

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