Dear Tax Talk,
Although I see many articles about the rate for withdrawing retirement funds, I’ve never found a discussion about minimizing taxes. I have $320,000 in an IRA, $160,000 in a Roth and $100,000 in a 401(k).

I will be getting +/- $25,000 from Social Security and need a total of $50,000 annually. How does a single person structure retirement withdrawals from the various types of accounts?
— Debbie

Dear Debbie,
Congratulations on preparing ahead of time for your retirement years.

Bankrate has published a few stories on the topic of how to structure retirement withdrawals to minimize taxes, including 5 ways to reduce taxes in retirement, 6 strategies to minimize taxes and preserve your nest egg and Tax savvy retirement plan distributions.

You structure retirement withdrawals after taking into account the taxes that your retirement income may generate in your particular situation, which depends on if and when you receive income from each of your retirement sources of income. Additionally, you need to factor in tax deductions that will minimize any tax liability that may be generated when you take the withdrawals.

It is important that you understand what happens with Uncle Sam once you make the move to no longer work. So here are some considerations, below.

Tax ramifications in retirement

  • Social Security benefits may be taxable to you if you are receiving income from other sources and if half of your Social Security benefits added to all of your other income, including tax-exempt interest, is above the “single” base amount of $25,000. This base amount also applies to head of household, qualifying widow or widower with a dependent child or married filing separately if you lived apart from your spouse for all of the year. For those who are married filing jointly, the base rate is $32,000, and it’s zero if you are married filing separately and lived with your spouse at any time during the year.
  • The withdrawals from the IRA and your 401(k) are taxable and, if made before the age of 59 1/2, may be subject to an additional 10% tax. Also, required minimum distributions, or RMDs, must be made no later than the year after you turn 70 1/2.
  • The Roth IRA does not require any distributions, and if you meet all of the requirements, then you do not have to pay tax on the earnings withdrawn. This account gives you a lot of flexibility in minimizing tax liability.
  • If you plan to itemize your deductions or have other deductions from capital losses, etc., this will need to be factored into your situation.
  • Your current age is a factor in this process as it determines the amount of your Social Security benefits and the date for RMDs from the IRA and 401(k) accounts.

You may wish to sit down with a qualified individual who can assist you in calculating various “what if” scenarios, keeping in mind all of your particular facts. It will give you an added measure of comfort knowing what will happen when you make the withdrawals from each of your retirement income sources.

Thanks for the great question and all the best to you in your retirement.

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