When I retire, should I really pull money out of my brokerage account first when all my investments are long term?

Question

Preparing to retire and I've looked at a lot of info on the internet and it all says the same thing: pull money out of your high taxed brokerage account first so you leave all that tax deferred money in your IRA alone. But, I think that's only correct if you have short term investments (that would generate lots of taxes). All mine are long term. Thus, I don't pay taxes on them until I sell and, when I sell, the capital gains tax is low. Instead, I think people in this situation should pull money of the the IRA first.

So, am I missing something, or is the internet "conventional wisdom" making assumptions that make that incorrect for my situation?

(In case someone brings this up, 2/3 of my brokerage account's dividends are qualified which makes them tax friendly).

Answer 1

Your primary focus in retirement should be preservation of assets. Assuming that's resolved, despite popular wisdom, I would withdraw the assets that incur the lowest amount of taxation with the intent of having the highest taxed assets going to my heirs with a stepped up basis (no taxation).

In addition, if you minimize the tax bite of a withdrawal (for example, LIFO in a non sheltered account?), you reduce the amount that you have to withdraw, leaving more assets available for growth.

The above is a generalization. What's best will depend on how much you need to withdraw, the amount of capital gain on assets sold, and what tax bracket you're in along with the amount of tax due. You should run both scenarios and see which one best suits your situation.

Answer 2

Preparing to retire and I've looked at a lot of info on the internet and it all says the same thing: pull money out of your high taxed brokerage account first so you leave all that tax deferred money in your IRA alone.

Do they say to pull all of your money immediately out of all your taxable accounts??

No, they don't.

1. Sell long-term investment first,
2. only what you "need" (for varying definitions of "need"),
3. on a schedule (monthly, quarterly, etc), and
4. in a year or so any short term investments are now long-term investments...

I've not mentioned selling your risky equity investments, since I take for granted that you've been slowly moving them into safer investments over the past 10 years.

Answer 3

You could look at it both ways - would you rather pay "income" tax by pulling money out of your IRA now and pay less taxes from your brokerage gains later, or pay less tax now and defer the higher taxes to later (or possibly avoid them altogether if the IRA is bequeathed to your heirs).

Most people in retirement are in a low tax bracket because by definition they have less income, so pulling out of an IRA is not as big of a tax burden. But everyone's situation is different- if you require so much that it would push you into higher tax brackets, then perhaps tapping your investment accounts first is a better move. Or if you'd have a lot of short term gains and want to keep them until they become long term gains, then tapping the IRA first may be optimal.

Answer 4

It’s impossible to say which funds you should spend first without knowing your total financial picture and life circumstance. The best way to get an answer based on actual facts and numbers is to hire a certified financial planner on a fee-for-service basis and disclose the details of your holdings, your income from pensions and Social Security, your expenses, your debts, your age and life expectancy and your long term goals.

A good financial planner will have access to one or more software packages such as Money Guide Pro that can take all your numbers and details and run them through Monte Carlo simulations: thousands of iterations of “what if” scenarios that include random factors that account for ranges of possible outcomes. The planner can run different total-picture scenarios that differ only in which funds are spent first. Then you'll know.

It definitely makes a difference, so paying for professional advice can reap big rewards in the long term. Any good financial planner has performed this service for many clients and should be able to give you a ballpark estimate of cost before you commit to anything.

Answer 5

Understanding that you wish to aim for a zero balance at death,b and not knowing if you are single or married, I'm using MFJ numbers.

Having a mix of pretax (traditional 401(k)/IRA) and other investments is ideal at retirement. 100% traditional or 100% Roth missed a bit of tax savings.

(Keep in mind, without knowing the numbers, this is an example of my thought process)

Say you need $120K to live on this year. $24,800 std deduction. $95,200 would be taxed. The 12% bracket ends at $81,050 so I'd want $14,150 to come from my Roth/Cash account, and the rest can be withdrawn from my pretax money.

In general, I'm looking at a combination of taking advantage of the 10/12% brackets while not pushing into 22%. For the member retiring on, say $60K/yr, I'd just be mindful of the interaction of Social Security taxation and your other retirement income. Possible that topping off the 12% bracket via Roth conversion can save big on the tax bill when one start taking the Social Security benefit.