In this blog, we’ll explore the often-overlooked strategies for saving thousands of dollars in retirement. We’ll share an eye-opening example of a couple who benefited greatly from these techniques, proving that proper withdrawal planning is just as critical as saving and investing.

Stage One: Proper Saving and Investing

The traditional approach to retirement planning focuses on saving enough, choosing the right investment accounts, and building a strong investment portfolio. These factors are undoubtedly essential for a financially secure retirement. However, as we move into stage two of retirement, a new game begins: strategic withdrawals from various accounts become key to financial security.

The Game-Changing Stage: Strategic Withdrawals

To achieve financial security in retirement, it’s crucial to understand how to make the most of your funds during this phase. There are three critical strategies to accomplish this:

1. Money Pools

Most people are familiar with the primary three money pools: taxable brokerage accounts, traditional IRAs, and Roth IRAs. However, there’s a fantastic fourth option that many overlook: the reserve fund. This fund comprises low-risk, tax-efficient assets like savings accounts, money market accounts, and laddered CDs. Using the reserve fund effectively can lead to opportunistic withdrawals and significant tax savings.

2. Required Minimum Distributions (RMD)

RMD refers to the minimum amount you must withdraw from your traditional IRA or employer-sponsored retirement plan after reaching a certain age (usually 72). The goal is to reduce the forced withdrawals and potentially lower your tax liability.

3. 0% Tax Rate for Capital Gains

By paying close attention to your taxable income, you may qualify for a 0% tax rate on capital gains. In 2023, for singles, taxable income up to $44,625 qualifies for 0% tax, and for married couples, it’s up to $89,250. Utilizing this tax-efficient strategy can lead to significant tax savings.

The Key Mistake: Traditional Withdrawal Order

Conventional retirement planning typically advocates withdrawing from taxable income accounts first, followed by tax-deferred accounts, and then Roth accounts. The idea is to maximize the growth of your nest egg. However, this may not always be the most tax-efficient approach in the long run.

A Better Strategy: Diversified Withdrawals

Instead of following the traditional withdrawal order, consider starting with taxable brokerage accounts and the reserve fund. Doing so allows you to recognize gains at a potential 0% tax rate. By thoughtfully diversifying withdrawals, you can lower your tax burden significantly and extend the life of your retirement savings!

An Illustrative Example

Let’s consider a couple who retired in their late 60’s with social security, a pension, and three money pools: taxable brokerage accounts, traditional IRAs, and the reserve fund. They faced the problem of being forced to withdraw more from their IRAs than they needed to cover their expenses. This situation led them to unnecessary tax liabilities.

The Solution: Optimized Withdrawals

To optimize their withdrawals, the couple decided to start using the taxable brokerage accounts and the reserve fund to supplement their income. By doing so, they could take advantage of the 0% tax rate on capital gains in their brokerage accounts. They also considered converting some of their traditional IRAs to Roth IRAs to reduce future RMDs.

Charitable Giving Strategy

Additionally, the couple decided to implement a charitable giving strategy. Rather than donating cash, they used their RMDs to go directly to the charity of their choice. This approach allowed them to fulfill their charitable goals while avoiding tax on the RMDs.

Conclusion

The key to saving thousands of dollars in retirement lies in strategic withdrawals and optimized tax planning. By considering money pools, RMDs, and the 0% tax rate for capital gains, you can create a tax-efficient retirement plan that not only benefits you during your lifetime but also your heirs in the future.

To ensure you implement these strategies effectively, consult a trusted financial and tax planning team to tailor the approach to your specific circumstances. By adopting these withdrawal tactics, you can secure a prosperous and tax-optimized retirement!

Disclaimer: Since we don’t know your specific situation, none of this information should be construed as tax, legal, financial, insurance, financial advice, or other advice and may be outdated or inaccurate. It is your responsibility to verify all information yourself. This content is prepared for entertainment purposes only. If you need advice, please contact a qualified CPA, attorney, insurance agent, financial advisor, or the appropriate professional for the subject you would like help with. Streamline Financial Services, LLC or its members cannot be held liable for any use or misuse of this content.

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Disclosures: Securities offered through LaSalle St. Securities LLC (LSS), member FINRA/SIPC. Advisory services offered through LaSalle St. Investment Advisors LLC (LSIA), a Registered Investment Advisor. Streamline Financial Services is not affiliated with LSS or LSIA. LSS is affiliated with LSIA.