After years of working hard and contributing to your retirement account, the day has finally come—you’re ready to start tapping into your savings. But when it comes to actually withdrawing funds from your retirement account, the process can feel a bit overwhelming. With rules, taxes, and penalties to navigate, it’s essential to make smart decisions that preserve your savings while funding your golden years.
Here’s your step-by-step guide on how to start withdrawing from your retirement account without any hassle.
1. Know Your Withdrawal Age and the Rules
Before you start withdrawing, it’s important to understand when you can start without triggering penalties. Here are some key ages to keep in mind:
Age 59½: You can begin withdrawing from most retirement accounts (like 403(b), 457(b), 401(k), or IRAs) without incurring a 10% early withdrawal penalty.
Age 72: This is when Required Minimum Distributions (RMDs) kick in for most retirement accounts. If you don’t start withdrawing by this age, the IRS imposes a steep 50% penalty on the amount you should have withdrawn.
If you’re part of a 457(b) plan, one major advantage is that you can start withdrawing without the 10% penalty as soon as you separate from your employer—no matter your age. That’s something 401(k) and 403(b) plans don’t offer.
2. Plan Your Withdrawal Strategy
Retirement is all about making your money last, so you’ll need a strategy to withdraw your savings in a sustainable way. There are a few popular approaches:
The 4% Rule: This rule suggests you withdraw 4% of your portfolio in your first year of retirement, adjusting for inflation in subsequent years. It’s a simple way to make sure your nest egg lasts for 30 years or more.
The Bucket Strategy: With this method, you divide your savings into three buckets—short-term (cash and low-risk investments), medium-term (bonds), and long-term (stocks). You’ll draw from the short-term bucket first while the other buckets grow.
At Provizr, we can help you craft a personalized strategy that balances your needs for income today while safeguarding your wealth for the future. Whether you’re working with Fidelity or TIAA, we’ll make sure your plan fits your goals.
3. Understand Taxes on Withdrawals
Unfortunately, taxes don’t stop when you retire. How much you’ll owe depends on the type of retirement account you have:
Traditional 403(b), 457(b), 401(k), and IRAs: Withdrawals from these accounts are taxed as ordinary income. That means the more you withdraw, the higher your tax bill will be.
Roth IRA: If you’ve been contributing to a Roth IRA for at least five years and you’re over 59½, your withdrawals are tax-free. This is why many financial advisors recommend keeping a Roth IRA in your retirement plan.
TIAA Traditional Annuity: If you’ve invested in this option, know that you may be subject to different tax rules depending on how you structured your annuity.
The key is to withdraw in a tax-efficient way. For instance, withdrawing from taxable accounts first or from lower-tax brackets can help minimize your overall tax burden. At Provizr, we offer free tax guidance to help you keep more of your hard-earned savings.
4. Set Up Direct Deposits or Scheduled Payments
Once you’ve determined how much you’ll withdraw and how frequently, it’s time to set up your withdrawals with your plan administrator.
Fidelity and TIAA: If you have a retirement account through Fidelity or TIAA, you can easily set up scheduled withdrawals, often on a monthly, quarterly, or annual basis. This ensures a steady stream of income, which can help you budget more effectively in retirement.
Keep in mind that each plan may have its own process for setting up withdrawals. Whether you want a lump sum or a regular payout, Provizr can help walk you through the process to ensure your payments are aligned with your overall strategy.
5. Factor in Required Minimum Distributions (RMDs)
Once you hit age 72, you’ll be required to start withdrawing a certain amount each year from your traditional retirement accounts. This is known as your Required Minimum Distribution (RMD).
The amount you’re required to withdraw depends on your account balance and your life expectancy, as calculated by IRS tables. Keep in mind that RMDs are not required for Roth IRAs (though they are for Roth 401(k)s), which is another reason to include Roth accounts in your overall retirement plan.
Failure to withdraw the full RMD can result in a hefty penalty—up to 50% of the required amount. If you’re unsure how to calculate your RMD, Provizr can help ensure you’re compliant with IRS rules.
6. Consider Other Income Streams
While withdrawing from your retirement accounts is essential, you may have other income streams to consider as well:
Social Security: Many retirees supplement their withdrawals with Social Security benefits. Keep in mind, however, that claiming Social Security early (before age 67) reduces your monthly benefit.
Pensions or Annuities: If your university retirement plan includes a pension or annuity, you’ll want to integrate those payments into your withdrawal strategy.
By coordinating these different income streams, you can create a more predictable retirement income and minimize the need to make large withdrawals from your retirement savings all at once.
7. Don’t Forget About Inflation and Healthcare Costs
When planning your withdrawals, don’t forget to factor in inflation and rising healthcare costs. As you age, healthcare is likely to become a bigger part of your budget, and inflation can erode your purchasing power over time. Be sure your withdrawal strategy accounts for these variables so that you don’t outlive your savings.
At Provizr, we offer annual portfolio tune-ups to make sure your retirement plan stays on track as market conditions change. We’ll help you adjust your withdrawals if needed and make sure your portfolio is set up for long-term growth.
Final Thoughts
Withdrawing from your retirement account doesn’t have to be stressful. By understanding the rules, planning your withdrawals wisely, and factoring in taxes and inflation, you can enjoy a comfortable retirement while preserving your savings.
Ready to start withdrawing from your university retirement account? Provizr is here to help. Whether you need help calculating RMDs or optimizing your tax strategy, we’ve got you covered. Schedule a free consultation today and take control of your financial future.