United States: Your Retirement Income Strategy: Conventional Wisdom On Withdrawals Is Not Always Right

Last Updated: January 31 2016
Article by Steve Lewis

There is more to a financially successful retirement than accumulating a large portfolio. You also need to make good decisions about how to withdraw your assets once you are no longer working full time.

For many savers, developing a retirement income strategy is an afterthought and they run the risk of losing a significant chunk of their retirement savings to taxes. To maximize the odds of achieving your lifestyle goals in retirement, it is important to come up with an income strategy that accounts for the tax consequences of making withdrawals.

Merits of Variable Withdrawals

When it comes to retirement income planning, conventional wisdom is not always appropriate. Consider the oft-cited recommendation that retirees should withdraw approximately 4% of their retirement portfolio annually. This can be a good general guideline, however, some may find it poorly matched to their income requirements.

An alternative approach is to vary annual retirement withdrawals based on a combination of factors, such as economic and market conditions, the size of the portfolio and the expected length of retirement. You will also need to look at your spending needs. Many people have higher expenses in the first phase of their retirement as they pursue travel and other costly leisure activities, while their goals and income needs may change in their later years.

Inflation may influence your withdrawal strategy, too. Low anticipated inflation can support higher withdrawals. However, if inflation is climbing or expected to climb, you may need to adjust your withdrawals accordingly to reflect the reduced value of your portfolio.

Taxable vs. Tax-Deferred Accounts

Another common maxim is that you should liquidate securities from taxable investment accounts before you tap into tax-deferred accounts. The logic here is that withdrawals from taxable accounts with appreciated assets are taxed at a maximum 20% capital gains rate if they are held for more than one year. In contrast, withdrawals from tax-deferred accounts are taxed as regular income at federal rates as high as 39.6% (plus any state income tax owed).

Accordingly, you would need to make larger withdrawals to end up with the same amount of after-tax money. Plus, leaving assets to accumulate in a traditional IRA or 401(k) account gives those assets more time to enjoy compounded, tax-deferred growth.

Research by Rider University professors Lewis W. Coopersmith and Alan R. Sumutka confirms that liquidating taxable investments first makes sense — in some situations. For example, it might benefit individuals with limited taxable savings whose return on taxable assets is similar to or less than the return generated by their tax-deferred assets.

However, other individuals might want to consider the opposite approach. Withdrawing from taxable accounts first can increase the required minimum distributions (RMDs) you must begin taking from traditional IRAs, 401(k)s and other tax-deferred accounts starting at age 70½. If you neglect to take your RMDs, you face a big tax penalty — 50% of the amount you didn't withdraw — so it should never be considered a viable option. (Note that RMDs do not apply if you have tax-free accounts such as a Roth IRA and Roth 401(k).)

By delaying your RMDs until the last possible moment, you can increase your taxable income over a shorter time frame, which could place you in a higher tax bracket when RMDs begin, thus reducing your overall income. Taking this longer-term view when withdrawing funds for retirement, rather than simply minimizing your current tax, may allow you to increase the total amount of money you can keep after taxes.

Strategy That Reflects Your Needs

Conventional wisdom regarding retirement account withdrawals may work for you, but probably only to a certain extent. Your retirement needs are unique, which is why it is important to work with a knowledgeable tax advisor. Your advisor can recommend a withdrawal strategy that maximizes your retirement income when you need it most and makes it possible for you to achieve your retirement goals.

Sidebar: Realizing Your Wealth Transfer Objectives

If you expect to pass along wealth to your loved ones, you have another important reason to pay close attention to the income tax impact of your withdrawal strategy: Your heirs will owe income taxes on any assets they inherit from tax-deferred retirement accounts.

If your primary goal is to maximize the amount that goes to your beneficiaries, it may make sense to withdraw from a traditional IRA or 401(k) before you do so from a Roth IRA or other tax-free account. This may allow your beneficiaries to take more or all of their distributions from the Roth IRA, free of income taxes. Note, however, that these proceeds will still be considered part of your estate and thus subject to estate taxes — an important consideration if your estate is large.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Steve Lewis
Similar Articles
Relevancy Powered by MondaqAI
Ostrow Reisin Berk & Abrams
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Ostrow Reisin Berk & Abrams
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions