Drawing Down Your Retirement Funds – What Is A Progressive Draw Down?

Q.  I am 62 and have spent the last forty-five years saving for retirement. I plan on retiring in about five years but I am told that I need to be careful when and how I take out my money from my retirement accounts and that certain retirement accounts allow for a draw down while others do not without incurring a penelty. I would like to learn more about “draw downs” before having to spend the time and money meeting with a tax attorney.

A. Timing is everything. Especially when it comes to retirement. Just as important as building your retirement in progressive stages, you will also need to know the proper sequencing of the mandatory distributions and drawdown of those assets. This is what accountants refer to as our “gap years.”

Proper downward sequencing refers to accessing retirement funds in a manner that results in the least amount of tax liability and the most amount of growth. Today, there are several types of financial vehicles in which to park one’s retirement. Knowing the difference between a tax-deferred Traditional IRA or 401(k) and a “tax-free” Roth IRA (which are funded by after-tax contributions), as it relates to the gap from each source, can make a big difference between out-living one’s money and live comfortably in retirement.

What is called the gap years of ages 62 to 70 ½ are when most retirees generally have the least amount of taxable income, and why the distribution of funds from a taxable account makes the most sense — specifically when one’s tax bracket is at its lowest. At that time, a modest withdrawal from a Traditional IRA can have a negligible tax impact; whereas withdrawals from Roth IRAs are not subject to income taxes or capital gains taxes so it makes sense to leave the money alone and let it grow exponentially, tax-free.

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