Sign up for our eNewsletterBy Steve Doster | Mission Valley Money
Congratulations, you’ve made it to retirement! You’ve saved your entire life and now it’s time to stop living off your paycheck and start living on your savings and retirement income.
Some decisions need to be made about your employer savings plan. Employer savings plans include accounts with names like 401(k), 403(b), 457(b), and Thrift Savings Plan (TSP). The main decision is whether to leave your account at your former employer, or to roll them over directly into an IRA at a firm like Schwab, Fidelity, Vanguard, or any of the numerous brokerage firms.
When making this decision, consider the following:
- Expenses of the employer savings plan.
- Investment options available in the plan.
- Ease of monitoring the entire portfolio.
- Convenience of withdrawals.
These aspects should be compared to what is offered by an IRA. For example, can better mutual funds be purchased in an IRA compared to what is available in the company plan? How responsive is the customer service for the company plan? Is the plan flexible on withdrawals and investment changes?
There is no right answer that applies to everyone. Leaving your accounts at your former employer can work well or choosing to roll them into an IRA could also work. The decision is on a case-by-case basis; therefore, we encourage you to speak with your fee-only advisor before making this decision.
Withdrawing money
Withdrawals from IRAs and employer plans are allowed at any age. However, you will get hit with ordinary income tax and an additional 10 percent penalty if withdrawals are done prior to attaining age 59 and a half. After this age, the penalty goes away and withdrawals of pre-tax money are taxed at ordinary income tax rates.
For early retirees under the age of 59 and a half, there is a way to avoid the 10 percent penalty from IRAs using a withdrawal method called “substantially equal payments.” This is a bit more complex, so we will spare you the details. Additionally, someone retiring after age 55 can withdrawal from their employer plan after they separate from service, without incurring a penalty. It is important to know you can retire early, access your retirement savings, and avoid the 10 percent penalty. This also links back to the previous topic of whether to keep your employer accounts or to roll them over into an IRA.
How much should you withdraw from these accounts? The goal is to keep your annual withdrawals below 5 percent of your portfolio value. That includes your entire portfolio, not just your retirement accounts.
In general, the most tax-efficient way to withdrawal from your portfolio in retirement is in this order:
- Brokerage accounts.
- IRAs, 401(k)s and other tax-deferred accounts.
- Roth IRAs and Roth 401(k)s.
For someone with a large brokerage account, taking
the entire 5 percent withdrawal from brokerage accounts, while not touching IRAs or employer retirement accounts might be the best strategy, at least in the early retirement years. A different retiree may not have a sizable brokerage account and, thus, their entire 5 percent withdrawal may need to come from their IRAs or employer accounts.
Steve Doster
Each person has a unique situation, so it is important to work with a fee-only advisor that understands taxes to help with the details on how best to use your life savings to fund your retirement.
— Steve Doster, CFP is the financial planning manager at Rowling & Associates – a fee-only wealth management firm in Mission Valley helping individuals create a worry-free financial life. They help people with taxes, investments, and retirement planning. Read more articles at rowling.com/blog.
