Transcript:
Easan Arulanantham:
Where should I take my money from in retirement? First, you know, which account should I, you know, withdraw from? And, you know, should it be my IRA? Since it’s like specifically made for retirement right? Should I be taking that money first from my IRA?
Tom Vaughan:
Yeah, we often talk about kind of the three buckets, right? That people keep money in a generic sense, the IRA would fit in that tax deferred bucket, you know, could be 401k, for three, B, or all kinds of different things that fit into that bucket. And the other buckets would be like a tax free bucket like a Roth IRA or Roth 401k. And then we call the taxable bucket, right. So that money that’s, you know, outside of those two, that when you make transactions, it’s taxable, there’s a, if there’s a dividend or income, you pay taxes on it that year. And so of those three buckets, a lot of people had into retirement. And even if they have money in all three buckets, they still look at that 401k, or IRA, and say to themselves, that’s where I’m going to start taking money from, because that’s what I’ve been saving for, I’ve been putting money into my 401k to retire. And now I’m retired, and I’m going to live off my 401k, which is fine, if that’s the only asset you have, right? If you have Roth, or four or Roth 401k or Roth IRA, you definitely don’t want to touch those unless you absolutely have to, because it’s tax free. So I’d rather take it from my taxable IRA than my Roth IRA, if I had a choice. But the best place to take the money from is from your taxable accounts, with some caveats. So from a tax standpoint, taking money from a taxable account is cheaper, because you get capital gains rate, and it’s only on the gain, you can take your principal back without gains. And so and then you’re not losing out on that tax deferral that you would be losing out if you were taking out of your IRA. And so, you know, there’s some big advantages there. But there are, there’s some nuances here, you have to be careful with, you got to be really careful with what what structure you’re talking about here is your taxable assets really fairly low, and you want to make sure you have enough money there for liquidity, that then you shouldn’t be withdrawing from that.
Maybe your taxable assets are invested in a really good stock that’s just doing fantastic that you used to use to work at that company. And you got to be really careful about selling that because it could create tremendous wealth for you, right. And so I have a concept that I call the fruit tree approach where we maybe pick $1 amount that we want to let it to grow to. And then every time it gets above that, we take some off, and we live off of that, you know, fruit off of that tree, still keeping the tree in place by having a pretty good exposure there. If it’s a good company. With it, there’s lots of different things. It’s a complicated question, more so than you know. But it does make a huge difference. When we go through the planning process and show what you’re talking about is the you know, sequence of withdrawals, where do you withdraw from first, second, and third, it makes a huge difference in the overall assets that are available later on in retirement. So it is something I don’t think people pay attention to this. I don’t think even other advisors pay attention to this. I’ve seen it a lot. I’ve seen other situations where people have come in and they’re taking money out of their 401k or IRA at retirement. And you show them the numbers and show them what would happen if they did that versus something else. And it creates this huge differential in their net worth later in their retirement. It’s crazy. So it’s a good question. Actually, it’s something we just can’t talk about enough because so many people don’t really get it. And I do think it’s important, I think it’s one of the biggest value add things that we bring into the practice is just showing guiding people on exactly where to get the money, how to get the money, and what’s the most efficient manner. And you know, we’ve been doing this for over 35 years, our average client is 74 years old, we’ve been down this path, we know how to get money, for income for retirement, that is what we’re good at. And so you know, that just from experience, just watching what works and what doesn’t.
Easan Arulanantham:
Yeah, and by doing if you’re taking from taxable accounts, first you’ll, it will cause her, you know, your 401k and your IRAs to grow longer. And so you’re gonna have bigger RMDs unless you do conversion. So that’s something I’m taking to consideration. So maybe if you’re not doing conversions, and you hit in your 80s, you can take a lot of money out of your accounts because of that.
Tom Vaughan:
Yeah, that’s right. So if you’re not taking from your 401k or IRA, right, then you’re taking from your taxable accounts, all of a sudden, you get to be 70 to 75, and the Required Minimum Distributions really jump up. And so one way around that is to actively look at conversions from your IRA or Roth of two to a Roth IRA or 401k to a Roth IRA. And so that’s part of that strategy that I think it’s another area of specialty that we’re really good at too is can Looking at that year by year and figuring that out, and it’s really a good point exactly right, if that should go hand in hand, if possible. However, even without conversions, what we’ve seen in the calculation is that you’re still better off, I still have a higher net worth throughout your lifetime, by doing the correct sequence of withdraws. It gets even higher with conversions, especially done properly. The right tax brackets and this stuff is much more complicated than people realize. To do right, and to get so that, that that’s, that’s fun for us. We love that kind of stuff. And we’ve been doing it enough, we kind of got some good answers there.
Easan Arulanantham:
Yeah. And the great part is it’s not market dependent, you know, if we do the sequence overdraws Correct. Or if you’re doing a sequence of withdrawals correctly, market performance doesn’t affect that sequence. Yeah. And so like, you can make money without depending on the market, which is really nice.
Tom Vaughan:
Yeah, exactly. Right. Yeah, that’s what I like about tax planning in general, which is kind of what we’re talking about here really is the sequence of withdrawal has a lot to do with tax planning, conversions have everything to do with tax planning. You don’t need a you know, it’s not, Hey, I am going to get more net worth because the market makes more, which is obviously, you know, not always true. Whereas with a tax savings, that’ll increase your net worth. So, it tax planning is different from tax preparation. And I think this is a really important point. And so many people are meeting with people that do tax preparation. And so they’re looking at this year’s tax term, maybe next year’s tax return tax planning and looking at the potential taxes throughout projected taxes throughout the rest of your life. And then you make adjustments to the plan and see how much to have, what difference that makes, how much tax do I save for the rest of my life? And then you keep making adjustments to that as taxes change, you know, laws change. And so you’re constantly looking long term. So tax planning is a totally different animal. I think it’s much more powerful than tax preparation. Although we have to do tax preparation, we have to file our tax returns, but I think there’s much more money to be saved by looking at tax planning and I think that’s a really big aspect of you know, of your retirement if you want to get good at it.