On March 23, 2022

What to do with retirement income

By Kevin Theissen

Many people assume that when retirement rolls around, they should draw cash from their taxable accounts first.

Generally, this is a good idea, but not always. A fundamental of tax planning is to put off paying taxes for as long as possible. By investing money rather than turning it over immediately to the IRS, you can earn returns that are yours to keep. Tax deferral acts like a loan that pays interest to the borrower. This is why IRA rollovers are such a great idea as you can keep deferring the taxes on your retirement distributions and put that money to work in investments, rather than losing a chunk to current taxes. When deciding which retirement accounts you should access first, you’ll need to consider not just the character of the account itself— taxable, tax-deferred, or tax-free—but also the particular investments within each account.

The first item that everyone should consider is to create a cash bucket that contains anywhere from one to three years of living expenses in safe, liquid investments such as money market funds, treasury bills, short-term bonds, or CDs. If you know where your next few years of mortgage payments and groceries are coming from, you are far better equipped to tolerate the volatility that can go along with a diversified portfolio.

The downside of tax deferral as it relates to IRAs is that it can’t go on forever. Investors must start taking required minimum distributions at age 72 and the larger the account, the larger the distributions—and the tax—will be. If the account is large, the required distribution could throw you into a higher tax bracket.

It is possible to defer tax in a taxable account. One way is to buy growth stocks and hold them. So you could turn the taxable account into the tax-deferral vehicle and draw income from the IRA. If you had plenty of assets and won’t need to sell the growth stocks during your lifetime, your heirs will be happy, since they will receive a step-up in basis and owe no capital gains tax on the appreciation earned during your lifetime. If you are sitting on big gains in stocks you don’t want to sell, this could be a powerful reason to take income from the IRA.

Favoring the idea of withdrawing money out of an IRA account early doesn’t apply to the Roth IRA because they don’t have required minimum distributions at age 72. Since you never have to pay tax on Roth money, you’ll want to let it ride as long as possible, even into the next generation. Once a Roth IRA has been established, the only real reason to take money out is if you’ll need the income and have no other resources. T

here’s no absolute formula for planning retirement income. You must consider your income needs, tax situation, risk tolerance, life expectancy, and estate planning needs.

Kevin Theissen is the owner and principal of HWC Financial in Ludlow.

Do you want to submit feedback to the editor?

Send Us An Email!

Related Posts

 What’s in a name?

June 25, 2025
There’s nothing like a talk show to spark an idea for a column. Hosts Kelly Ripa and her husband, Mark Consuelos, recently discussed how people’s first names often serve as clues to the decade in which they were born. Some names that are rarely chosen today were popular in previous decades.  The given name that…

No patch left unskied

June 25, 2025
I’m calling it.   I drove around the long way, hoping to catch one last glimpse of the patch before we actually began hiking up into The Canyon. Partly because I wanted to see what I was getting into and partly because I wanted to make sure she was still there. I honestly wasn’t sure…

Pack up your troubles

June 25, 2025
The longest day of the year has officially come and gone, which means we are now on the slow, downhill slide toward winter.  Given that the days are currently long and the temperatures are nearing their peak, my family has opted for the traditional summer beach vacation. This is nothing new since we’ve rented a…

Life in a shell: eastern box turtle

June 25, 2025
As a budding naturalist growing up in the concrete-heavy environs of Boston, I would regularly thumb through my family’s collection of nature books and daydream about the creatures within. One species I was particularly drawn to was the eastern box turtle. These charismatic terrestrial turtles have high-domed shells festooned with colorful yellow or orange markings…