Sometimes the most obvious place to get the money isn’t necessarily the best place to get it.
Here’s something that surprises people when we begin talking about retirement income:
Not all of your retirement dollars are necessarily created equal.
You may have money in an IRA or 401(k), a Roth IRA, an investment account, or simply cash in the bank.
On a statement, it’s easy to add everything together and think: “Cool. This is how much I have for retirement.”
Technically, that’s true. But when it comes time to actually use that money, the account you withdraw it from can make a difference.
A Real-Life Example
I’ve had situations where a client needed a significant amount of money for a large expense, and the initial thought was simply to take it from their IRA.
The money was there. They had enough of it, so why not?
But here’s what many people don’t realize:
Money withdrawn from a traditional IRA generally counts as taxable income. In this particular situation, taking such a large distribution all at once could have increased the client’s income enough to trigger something called IRMAA.
In simple terms, IRMAA is an additional amount some higher-income Medicare beneficiaries have to pay on top of their regular Medicare Part B and Part D premiums.
In other words, that Social Security check that many retirees have come to rely on in retirement? There’s a real risk that the amount actually deposited could be further reduced—and in some cases, significantly—if their income exceeds certain amounts.
And this can happen by accident.
In this client’s situation, taking all of that money from the IRA in one year could potentially have created a larger tax bill and caused their Medicare premiums to increase later.
Suddenly, the question wasn’t: “Do we have the money?” Of course they did.
The better question became: “Is the IRA really the best place to get all of it?”
That’s when we began looking at other possibilities during our discussion.
This is also another reason why it’s not enough to simply have a plan—it needs to be reviewed regularly.
And the decisions that come up during retirement aren’t always just about taxes. In our example above, it was also about the potential impact on Medicare.
Other times, it’s about another often-overlooked consideration: opportunity cost.
For example, does it make sense to sell an investment that has the potential to continue growing when you may have cash or another source available that’s earning much less?
Maybe. Maybe not.
Again, that’s the point.
A withdrawal decision can affect more than simply the amount of money sitting in your account today.
It can potentially affect taxes, Medicare premiums, future required distributions, how long certain assets have an opportunity to grow, and even what you ultimately leave behind.
There Isn’t One Withdrawal Order for Everyone
This is where I want to be careful.
This isn’t a one-size-fits-all approach. It’s not about making decisions based on some “rule of thumb” or going off some hearsay like, “Always spend this account first, then this one, then this one…”
There is no one rule.
Whether I’m helping families in Milwaukee, Waukesha County, Lake Country, or elsewhere throughout Southeast Wisconsin, the appropriate strategy depends on each family’s circumstances.
There may even be times when the right decision changes from one year to the next.
And that’s really the point:
Retirement withdrawals should be decisions—not accidents.
Instead of simply asking: “Where can I get the money?”
Perhaps the better question is:
“Where should I take the money from—and what could that decision affect?”
Because over a retirement that could hopefully last 20 or 30 years—or longer—those decisions can add up.
Put simply, making thoughtful decisions about where your retirement income comes from may help your money last longer.
Conversely, making the wrong decisions could potentially cause those same assets to be depleted faster.
And that’s an important difference.
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