You Tap the Wrong Retirement Accounts
OK, your younger self was smart enough to build multiple streams of money to tap in retirement. The older, retired you needs to know which accounts to tap when. It pays to come up with a withdrawal strategy that minimizes taxes and avoids penalties.
As a general rule of thumb, Schwab-Pomerantz recommends tapping taxable accounts first and allowing your savings in tax-deferred accounts such as IRAs and 401(k)s to continue to compound for as long as possible before being withdrawn and taxed. Just remember that traditional IRAs and 401(k)s funded with pre-tax dollars are subject to required minimum distributions starting at age 70 ½. Miss an RMD and you’ll face a stiff penalty.
Additionally, keep in mind that Roth IRAs aren’t subject to RMDs and there are no deferred taxes to contend with since Roth contributions are made on an after-tax basis. The flexibility of Roths comes in handy in retirement as you try to manage income levels from year to year and keep taxes at a minimum.
