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Generally, most people are better off postponing withdrawals from retirement accounts until they need the money. But don't delay if waiting means that you must scrimp and cut corners — especially if you have the money to use and enjoy.
On the other hand, if you have other money you can use, tap those funds first. The longer your retirement account money is left alone, the longer it can grow without being taxed. Suppose that you retire at age 60. In addition to money inside your retirement accounts, you have money available outside as well. If you can, you're generally better off using the money outside of retirement accounts before you start to tap the retirement account money.
If you're not wealthy, odds are good that you'll need (and want) to start drawing on your retirement account soon after you retire. By all means, do it. But have you figured out how long your nest egg will last and how much you can afford to withdraw? Most folks haven't. It's worth taking the time to figure how much of your money you can afford to draw on per year, even if you think that you have enough. Many good savers have a hard time spending and enjoying their money in retirement. Knowing how much you can safely use may help you loosen your purse strings and enjoy retirement more.
 | One danger of leaving your money to compound inside your retirement accounts for a long time — after you're retired — is that the IRS requires you to start making withdrawals by April 1 of the year following the year you reach age 70.5. If you don't, you pay a whopping 50 percent penalty on the amount that you should've taken out but didn't. (Note: This requirement doesn't apply to the new Roth IRAs.) |
It's possible that because of your delay in taking the money out — and the fact that it'll have more time to compound and grow — you may need to withdraw a hefty chunk each year. Doing so could push you into higher tax brackets in those years that you're forced to make larger withdrawals.
If you want to plan how to withdraw money from your retirement accounts in order to meet your needs and minimize your taxes, some of the larger mutual fund companies have resources that can help you do the calculations. You could also hire a tax adviser to help. If you have a lot of money in retirement accounts, as well as the luxury of not needing the money until you're well into retirement, tax planning will likely be worth your time and money.
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