Managing the Sequence of Withdrawals is Key to Retirement Wealth Success
Transcript:
Katie Nealis:
“I am retired. I had an unexpected large expense that’s bigger than my emergency fund. Where should I pull the money from to pay it: Brokerage, IRA, or Roth IRA?”
Tom Vaughan:
Okay. Alright, so we have an expense that’s bigger than what we have available in emergency assets. And so basically, it’s called the “Sequence of Withdrawals.” This is actually one of the most important things that you need to know about in retirement, in my opinion, because an awful lot of people don’t understand where to get the money from, and they take it from the wrong place. And it can have a pretty damaging effect on your retirement. So for example, probably the worst place that you just mentioned to take the money from would be the Roth IRA, for a variety reasons. The Roth IRA grows without tax for the rest of your life: It’s the most powerful asset you have that you just listed there in my opinion. And so if you can leave that for longer and longer and longer, and it just means it grows tax free for longer and longer, longer. If you take it out, then that money doesn’t get to grow. That’s the most expensive money you could take out; even though it’s tax free. If you take a look at it in total. I would be looking at the brokerage account, unless there’s something very unusual there. And again, I’m giving you some generic answers here, because I don’t know all of the specifics. But the one advantage to taking from a brokerage account, instead of say the IRA, is that there will be a lower tax rate. The capital gains rate is lower than ordinary income, at any cost basis. So if I paid $10, for a stock that’s worth $15, I can sell it for $15. And I’m only going to pay the tax on the $5, I don’t have to pay the tax on the $10 that I already used, I already paid taxes on it, before I bought it. And so that’s a fairly inexpensive, versus if I pay, if I pull that full thing out of my IRA, all $15 would be taxable, at a higher rate: Ordinary income is higher in tax than capital gains rate. So I would say look at the brokerage account, as far as that goes. I’d be a little bit careful about really tapping into your emergency fund to greatly: Somehow, some way you need to kind of replenish that at some point in time. So it’d be interesting to look at that. If you’d like to, schedule an appointment that could give you some much more specific information on how to do that.
Easan Arulanantham:
Would you say with an RMD… Say someone’s taking an RMD on a regular basis: Wouldn’t be a good idea to speed that RMD up, essentially, and take it as a lump sum, to pay off that expense?
Tom Vaughan:
Yeah, I didn’t think about that, so good point. So if you’re over 72, and you have this emergency, and it’s bigger than your savings, then you are going to be required to take money out of your IRA account. Now, some one another nice thing about the Roth IRA, you don’t have to take anything out of that, which was why it’s more powerful. But on your IRA account, if you’re over 72, and you happen to be that already, you will be required to take this money out, and so you might as well go ahead and take that out, if you haven’t already, and use that towards this emergency. If it isn’t enough, then take the rest from your brokerage account, but that’s a really good point. It would only be important… and I don’t know your age, obviously, when you ask the question, but it would only be important if you’re over age 72. But it is a good point: Take your RMD earlier, if you haven’t already. Use that, because that’s going to come anyway. So I mean, it would have that, and then take the rest out of the brokerage if that doesn’t cover it.