When you pay taxes while you are working, it does not seem like such a big deal because you have a consistent paycheck coming in to balance what is being taken out. When you retire, however, taxes become more of a headache. This can be a scary thought if you are hoping to put as much of that money as you can toward your new lifestyle.

While you cannot get rid of taxes entirely, there are ways to minimize their impact. The first being the location of your investments. Where you put your investments has an impact on how much you pay in taxes. For example, Traditional IRAs, and most qualified retirement plans are taxed as regular income, while Roth accounts are tax-exempt.

The order in which you withdraw from your accounts also makes a difference. Following a specific order will help you avoid fines and higher tax payments.

Take assets from your accounts in the following order:

  1. Minimum Required Distributions (MRDs), also known as Required Minimum Distributions (RMDs), Traditional IRA and 401(k)
  2. Taxable Accounts
  3. Tax-deferred retirement accounts, such as a Traditional IRA, 401(k), 403b, and 457
  4. Tax-exempt retirement accounts, such as a Roth IRA or Roth 401(k)

Doing things in this order ensures you take out all your MRDs that are required for traditional and Roth 401(k) plans and traditional IRAs if you are over 701/2 years old. When you withdraw from this account, you must take out a specific amount to avoid a penalty. If you do not take out your entire MRD, you will likely have to pay a fine, which is typically half of what you were supposed to withdraw.

Next come your taxable accounts. Start taking out of these accounts once you have taken out of your MRD, or if you are not yet 701/2 years of age. You can continue to take out of your taxable accounts until you have completely exhausted them. Using your taxable assets for retirement withdrawals leaves your money in tax-advantaged accounts that can potentially become tax-deferred accounts.

If you have used up your assets in your taxable accounts, go to your traditional, tax-deferred accounts. Withdrawals from these accounts will require you to pay an ordinary income tax, but you will be leaving your Roth accounts alone, which can be beneficial to you later in retirement. This is because qualified withdrawals will not be taxed.


Schedule an in office or over the phone consultation to discuss how Miramontes Capital can help you with your new beginning through retirement planning.

Miramontes Capital is a Registered Investment Adviser. Advisory services are only offered to clients or prospective clients where Miramontes Capital and its representatives are properly licensed or exempt from licensure. This blog is solely for informational purposes. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Miramontes Capital unless a client service agreement is in place.