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Which Savings to Tap First
Slide 2: Which Savings to Tap First
By the time you retire, you will likely have a patchwork of different accounts: 401(k)s, traditional and Roth IRAs, and multiple brokerage accounts. It's nice to have flexibility, but it can be confusing to figure out where you should draw money from first.
Slide 3: Which Savings to Tap First

You may think $1,000 is $1,000 regardless of which account you take it from, but deciding which accounts to tap first can affect how long your money lasts because of different tax treatment.

And, if you're in the enviable position of having saved more than you need for retirement, certain accounts are more advantageous to pass on as a legacy.

Slide 4: Which Savings to Tap First

There isn't a one-size-fits-all solution for deciding which assets to tap first, but there are general guidelines. If you have a combination of taxable and tax-sheltered assets (like those in an IRA or company retirement plan), it typically makes sense to draw from your taxable accounts first and extend the benefits of your tax-sheltered accounts for as long as possible.

The assets you tap first should be more liquid than the assets you tap later. Assets you plan to tap within the next two to five years should be in highly liquid investments like CDs and money market funds. Don't depend on higher-risk/higher-return investments, like stocks, for short-term needs. Instead, allow those assets to appreciate over the longer term, gradually selling over time only to replenish your short-term investment allocations as needed.

Slide 5: Which Savings to Tap First
If you're age 70 ½ or above, the first step is identifying which of your accounts have required minimum distributions, or RMDs. Traditional IRAs and company retirement plans require you to take RMDs each year, and you will be penalized if you to not take them on time.
Slide 6: Which Savings to Tap First

Once you fulfill any RMDs, turn to your taxable assets. Start by selling assets with the highest cost basis first and then move on to those assets where your cost basis is lower (and your tax hit is higher). Relative to tax-deferred or tax-free assets, these assets have the highest costs associated with them while you own them, so it usually makes sense to deplete those first.

Taxable assets usually go in the "sell early" bin, but that's not true if you have highly appreciated assets and plan to leave money to your heirs. The reason is that your heirs will receive a "step up" in their cost basis, meaning that they'll be taxed only on any appreciation in the security after you pass away. However, there are restrictions in 2010 and the regulatory outlook for the future is far from clear. See this article for more details.

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Slide 7: Which Savings to Tap First
Next, tap any accounts funded with nondeductible contributions, such as traditional non-deductible IRAs. Once you've exhausted non-deductible accounts, move on to company retirement plans and traditional IRAs funded with pre-tax contributions.
Slide 8: Which Savings to Tap First

Tap Roth IRA assets last. Because you've already paid taxes on money in your Roth IRA, you are entitled to the full value of the account, including investment earnings, without owing any tax when you withdraw the money. And, Roth IRAs do not have RMDs. By keeping your Roth IRA assets intact for as long as possible, you maximize the opportunity for your assets to grow tax-free. Roth IRAs are also well-suited to pass on to heirs.

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Which Savings to Tap First
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