Top 5 Worst Ways to Withdraw from Your Retirement Accounts

There’s a wealth of information regarding planning for retirement but what happens when it’s time to access your savings?

  • Withdrawing from Your 401(k) and IRA before RMDs Start
    • You can withdraw money from your 401(k) at 59 ½
    • You do not need to start taking Required Minimum Distributions until 72, so instead use this time for money to keep growing with compound interest.
  • Cashing Out Early
    • Between jobs or early access – whether that’s because you think your money is better elsewhere or
    • A withdrawal made from a tax-deferred account before 59.5 will result in a 10% penalty for early withdrawal. Note this is in addition to taxing distributions as ordinary income.
  • Not starting with your investment income
    • If you withdraw from your investments first, it allows for more time for compound interest on your retirement accounts
    • Diving straight into your IRA or 401(k) could end up costing you years’ worth of income in retirement savings
    • Stocks, bonds, mutual funds, EFTs – All taxable therefore you will have to pay capital gains taxes on withdrawals.
  • Pulling from Tax-Free Savings First
    • The last place you should be withdrawing funds is from tax-free accounts like a ROTH IRA. Your most tax-advantaged type of accounts should be used for the very end and instead you should first withdraw money from tax-deferred accounts like a 401(k).
    • Your Roth IRA can keep growing as long as you don’t touch it and the IRS doesn’t need to tax it again.
  • Claiming Social Security Benefits as Soon as Possible
    • It’s tempting to begin claiming social security benefits right away at 62 but in order to maximize your Social Security benefits, waiting until age 70 will help you get your full entitlement.