The Hidden ($61,000) Savings of Account Sequencing in Retirement

By Kindur | November 22, 2019

Don’t forget the hidden savings in account sequencing in 2020. 

All these years you have been putting your savings into retirement accounts. But as you start taking funds out, you might wonder whether you should start withdrawing funds from your taxable, tax-exempt or tax-deferred account first. Turns out, it all depends. Retirees need to take into consideration their personal fact pattern (state/ federal tax rates, their mix of stocks and bonds, their other income, for example) and their savings goals. Are they trying to optimize their retirement savings for their own use during their lifetime? Or  leaving their savings as an inheritance? 

This is where some of the biggest retirement tax savings can be found. For a couple living in Florida with $1 million in retirement savings, being smart about account sequencing could add $61,000 to their retirement nest egg.

How did we calculate these savings?  We’ve built software that analyzes your financial information as well as your withdrawal needs, and runs through different scenarios to optimize your after-tax distributions over time.  The effect is a more stable tax bill through retirement, higher lifetime after-tax income and increased longevity of your investment portfolio.  

The strategies we consider when performing our analysis include:

Taxable first, tax-deferred next

This drawdown approach involves withdrawing from taxable accounts first, then tax deferred accounts (e.g. IRA & 401K accounts) and leaving tax exempt accounts (e.g. Roth accounts) for last.

Best when: 

  • Prioritize passing your estate to heirs
  • Potential lower tax bracket in the future

Taxable first, tax-exempt next

This drawdown approach involves withdrawing from taxable accounts first, then tax exempt accounts (e.g. Roth accounts) and leaving tax deferred accounts (e.g. IRA &401K accounts) for last.  

Best when: 

  • Seeking to reduce taxes during your lifetime
  • Potential lower tax bracket in the future

Tax bracket management

This drawdown approach involves withdrawing from tax deferred accounts (e.g. IRA & 401K accounts) first up to a specific tax bracket (e.g. 12%, 22%, etc), and then withdrawing from taxable accounts and leaving tax exempt accounts (e.g. Roth accounts) for last.  

Best when: 

  • Prioritize passing estate to heirs
  • Potential higher tax bracket in the future

All of the withdrawal strategies we employ automatically take into account any required minimum distributions (RMDs) in order to help you avoid costly penalties.

Learn how Kindur can help automate account sequencing.

About Kindur

Kindur is a New York based financial technology company dedicated to helping Baby Boomers feel prepared moving into retirement. We provide smart, automated advice to personalize your retirement strategy so you can manage your savings with confidence. Learn more at kindur.com/smartdraw

Follow Kindur

Get More News & Insights From Kindur

Important information & disclosures about Kindur’s Resource Center