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Retirement Withdrawals For Couples Are All About The Tax Brackets
A couple ’ s retirement withdrawals must take their brackets ( and their children ’ s ) into account .
By James G . Blase
FIDELITY RECENTLY RELEASED A NEW REport in its “ Viewpoints ” series , called “ Tax-Savvy Withdrawals In Retirement .” Here the firm discussed the ways retirees can boost their after-tax income . The good news , said the firm , is that there are several ways , especially when the retirees are using multiple account types , including traditional retirement accounts , Roth accounts and taxable accounts .
But then there ’ s some not-so-good news as well , says the firm : Choosing those accounts is complicated .
“ There are several approaches you can take ,” Fidelity says . “ Traditionally , tax professionals suggest withdrawing first from taxable accounts , then tax-deferred accounts and finally Roth accounts where withdrawals are tax-free . The goal is to allow tax-deferred assets the opportunity to grow over more time .”
Fidelity recommends that single retirees draw proportionally off each of their multiple account types during retirement , but the firm adds this caveat : “ If an investor anticipates having a relatively large amount of long-term capital gains from their investments — enough to reach the 15 % long-term capital gain bracket threshold — there may be a more beneficial strategy .”
Specifically , the firm says retirees “ may want to consider using their taxable accounts first to meet expenses . Once the taxable accounts are exhausted , the proportional approach can then be applied .” In the context of the entire article , it appears Fidelity is not actually recommending the exhaustion of the taxable account itself before applying the proportional approach , but instead only that retirees exhaust the recognized long-term capital gains inside the account during the year .
But there ’ s another issue Fidelity doesn ’ t address that I want to take up here : Though the firm ’ s conclusions may be appropriate for many retired single individuals , they don ’ t address the unique tax needs of retired married couples — or their kids .
Why Couples Are Unique
Let ’ s assume , for example , that two recently retired spouses , both age 64 , have a $ 2 million IRA , a $ 500,000 Roth IRA and $ 500,000 in other taxable accounts . They receive $ 60,000 annually in Social Security benefits ( or approximately $ 51,000 after 18 % in taxes are cut out , which include a 12 % federal tax and an assumed 6 % state income tax rate on the 85 % taxable amount of Social Security ). With their Social Security included , the couple need $ 120,000 a year to retire on ( or $ 10,000 a month ) after federal and state income tax , meaning they have to make up $ 69,000 in after-tax money from their own accounts .
So which source or sources of retirement savings should the couple draw from first to reach that $ 69,000 ?
SEPTEMBER 2023 | FINANCIAL ADVISOR MAGAZINE | 53