The theme this week on the Retirement Quick Tips Podcast is: penalty-free early withdrawals for retirement. 

Today, I’m talking about an important financial concept that you’ll want to have some knowledge about in retirement (regardless of whether you work with a financial advisor or manage your investment portfolio on your own) and that is the sequence of withdrawals. There is a specific spending order that you’ll need to consider when starting portfolio withdrawals in order to minimize taxes in the long-run, and it’s also a spending order that may help you avoid penalties on your withdrawals from retirement accounts prior to age 59 ½. 

The conventional wisdom says that the withdrawal order should be: 

First - taxable investment accounts like Joint, Single & Trust accounts. 

Then, once those accounts are spent or your required minimum distributions kick in, you should withdraw from your tax-deferred retirement accounts like your 401k and your IRA.

Lastly, if those assets are spent down, you would withdraw funds from your Roth last.

For many people, this withdrawal order makes sense, but what’s important to remember here is not that the withdrawal order should always be in this order (because in some cases you would be better off withdrawing from a combination of your taxable and tax-deferred accounts in the same year)...but what really matters is that depending on the types of accounts you have and how much you have in each account - if your assets are skewed more toward taxable or tax deferred accounts, and also your income and tax situation, withdrawal order matters.

Especially if you’re going to retire early, withdrawal order really matters, and that’s because if you have taxable accounts like joint, single, or trust accounts, those will allow you more flexibility, help you avoid the 10% penalty (which doesn’t apply to these accounts) and likely lower tax bills in the early years of retirement if you withdraw from those accounts prior to age 59 ½. 

That’s it for today. Thanks for listening! Tomorrow I’m going to dive into strategies for when most of your assets are in 401k or Traditional IRA accounts and you need to avoid that 10% penalty on withdrawals. 

My name is Ashley Micciche and this is the Retirement Quick Tips podcast. 

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Tags: retirement, investing, money, finance, financial planning, retirement planning, saving money, personal finance