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Retirement spending with heirs in mind, a Money Talk Video with Dave Sandstrom
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Joel Dresang: Dave, investors tend to put money in different sorts of accounts over the years – their IRAs and brokerage accounts. When it comes time to retirement and time to take money out of those accounts, how do they know which accounts to take money from?
Dave Sandstrom: Joel, it’s an excellent question, and it’s something that I spend a lot of time with clients on. And while there’s no one-size-fits-all answer, I think it’s really important to have a good plan because making mistakes in this area can be very expensive.
Joel: So let’s talk about some of the more common accounts, and the considerations that investors should make. Let’s start with the individual retirement account, or the IRA.
Dave: So Joel, a traditional IRA is money that we’re allowed to invest prior to paying taxes on it. It gives us the ability to start with a larger amount, and let that grow through our working years to retirement. We are restricted to leaving it in there until we’re 59½, and then of course, the government’s going to come along at age 70½ and require that we start those distributions. And those distributions then, are going to be taxed as regular income.
Joel: What about Roth IRAs?
Dave: Roth IRAs is money that we’re going to pay taxes on first, then invest the money into that retirement account, and now we’re allowed for that money to grow tax-free for the rest of our lives. And then we’re going to be restricted on the access of that money until we’re 59½. All those distributions are tax-free, and there are no required minimum distributions at age 70½.
Joel: So, the traditional and Roth IRA are tax advantaged accounts, what about taxable accounts like brokerage accounts?
Dave: So in a taxable account, it’s money that we pay taxes on first, invest it into the account, and then we pay taxes along the way. It might be on capital gains distributions, interest, dividends, long-term capital gains over time.
The advantage to that is they’re very flexible. You don’t have a minimum age to access that money. There are no RMDs or required minimum distributions that come along. And the overall tax amount could be less than what your ordinary income tax rates are, so there could be some real advantages there.
Joel: So, once we know about the basics of those sorts of accounts where we’re putting our retirement money, how do we decide when to take money out of which one?
Dave: So this is where the planning comes into play, Joel, and I would highly recommend that you enlist the help of a tax professional when you’re looking at this strategy.
A common goal is to reduce the amount of income taxes we’re paying in a given year. To do that, it could require a combination of distributions from each of those accounts.
Joel: And what about investors who don’t plan to spend all of their retirement money?
Dave: So, that’s a good point, Joel. You could have an entirely different plan if your idea is not necessarily to minimize your tax exposure but maybe to look ahead to the next generation and minimize that taxes that they’re going to pay on that money. Because, as these accounts pass through your estate, they all have different tax treatments, and it’s something that should be paid attention to.
Joel: So if I’m not ready for retirement, how does all of this affect me as far as my plans for investing?
Dave: Joel, there’s an opportunity if you have it, to invest in some different accounts. So, fill up that 401(k), contribute to Roths when you’re eligible, and the money you have beyond that, get into a taxable account. It’s nice to have that flexibility, to create some of these strategies in retirement. Look at the pros and the cons of each type of account before you do that. And again, I would enlist the help of a tax professional to help you get a proper plan in place.
Dave Sandstrom is vice president and an advisor at Landaas & Company, LLC.
Joel Dresang is vice president-communications at Landaas & Company, LLC.
Money Talk Video by Jason Scuglik
(initially posted Dec. 18, 2017; revised Nov. 12, 2024)