If you have a tax-deferred retirement account (such as an IRA) as well as investments in a taxable portfolio, which should you draw down first after you retire? You can begin with your taxable investments, leaving your IRA to compound, tax-deferred, until you reach age 70 1/2 and required minimum distributions begin. However, the more your money compounds, the greater the taxes that will be due at some point.
What’s more, the money that comes out of your IRA is fully-taxed at ordinary income rates, which can be over 40 percent. After age 70 1/2 you must begin to take minimum withdrawals, based on the size of the account. If the account keeps growing, you may be required to take an amount so large you’ll be pushed into a higher tax bracket.
Therefore, you may do well to withdraw retirement money from your IRA, even though you’ll have to pay income tax, and let the money in your taxable accounts continue to grow. Paying some tax now may mean paying less tax over the long run.