How to Develop a Retirement Cash Flow Distribution Plan

You have saved and invested funds for retirement and now you’re ready to begin tapping into that money. If you have only one retirement account withdraw the funds from that account. If, however, you have more than one account, the big question is—from what accounts should you withdraw funds first? Does it make a difference or is one account as good as the next?

Yes, the funds you tap first can make a difference. Let’s look at why this may be true.

Depending on whether you have used employer sponsored retirement plans, such as 401(k), 403(b), profit sharing or similar, the rules are different than if you have used IRA accounts or perhaps saved in non-tax-deferred accounts. The tax implications can make a difference in when to withdraw funds from some accounts and when it’s better to wait.

As a general rule, in years when your regular tax bill will be fairly high, you probably want to avoid adding to it by withdrawing funds from employer-sponsored or IRA plans. Money withdrawn from these non-Roth accounts will be added to your gross income, thereby increasing your tax liability for the year. So, in those years, if you have money saved in mutual funds or brokerage accounts, those might make more sense to tap for cash flow.

On the other hand, in years when your regular tax bill will be lower than normal, plan to make withdrawals from tax-deferred accounts. True, withdrawals from these accounts will be added to your gross income, but if it’s a bit lower than usual the additional income may not make too much of difference. Also, qualified withdrawals from Roth accounts will not add to your tax liability so think of these accounts almost as bonus money that adds to cash flow but not to the tax bill.

One thing to remember, when you reach age 72 you must begin receiving required minimum distributions (RMDs) from IRA accounts. If you are no longer employed, you also will have to do the same with employer-provided accounts such as 401(k) plans. If you’re still employed, you can delay RMDs from these accounts until you retire. Any RMDs will be added to gross income and likely will increase your tax liability for that year. Keep this in mind if you have the option of withdrawing funds from Roth accounts or others where you will not be adding any taxable amounts.

If you have a pension plan, those payments will begin when the plan documents state—either at a given age, employment status or a combination (e.g., at least 65 years old with 40 years continuous participation and separated from service). These payments may be enough to allow you to delay filing for Social Security retirement benefits. Or, you may need to supplement pension payments with income from a part-time job or another income source. Here’s why you may want to delay filing for Social Security benefits. If you file at your full retirement age (FRA; e.g., 66 or 67) you will receive the full primary insurance amount (PIA). This amount is based on a formula incorporating your highest 35 years of earnings. Let’s say your PIA monthly FRA benefit is $1,500. It would be nice if that could be a little higher wouldn’t it? It can be. For every year until age 70 you delay filing for benefits after reaching FRA you get a roughly 8% annual benefit increase. In this example, if your FRA is 67 and you delay filing until age 70 (the latest year to receive delayed retirement credits [DRCs]), your $1,500 monthly benefit would become a little more than $1,860. Moreover, you keep that increase for life. That’s why you want to delay filing if you are financially able.

One potential plan would be to add cash flow from any qualified plans to any pension benefits, which could give enough income to allow you to delay filing for Social Security retirement benefits and gain that extra monthly amount. Over a 20 year period, assuming regular benefit cost of living increases, that can add up to around an extra $100,000 – a not insignificant additional amount of income.

Can you be certain this makes sense for your specific situation? Yes, but you most likely will want to discuss your options with a qualified and trusted financial advisor. There are other options that may make sense for you. This article is intended to help you think through some of the options. Another good reason to meet with your trusted, professional financial advisor.