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Retirement

How to set up your withdrawals

Coordinating withdrawals among multiple accounts can be tricky. For most people, these steps give you a tax-efficient way to use your money.

3 minute read

1. Set up a money market account

You'll still have bills to pay in retirement, but you probably don't want to move money directly from your investments to your bank account every time you need to pay one.

For one thing, frequent transactions mean market swings could have a bigger impact on you—if you're forced to sell shares whenever you need cash, even if the value of your investments has dropped.

Instead, think about opening an account in a money market fund. You can move a year's worth of withdrawals to your money market account at one time, to lessen the impact of market swings.

You can also direct any other income streams (like Social Security) into your money market fund. Then transfer one month's worth of expenses at a time to your bank account, and pay your bills from there.

Make it easy:

It will be easier to set up your ongoing withdrawals if you move your accounts to one financial company. That way, you can see all your money at a single glance—and it could even give you a chance to lower your investment costs, giving you more income every year.

Learn more about rollovers

Learn more about how to transfer an account

See how investment costs affect your retirement spending

2. If you're the Required Minimum Distribution (RMD) age of 73*, take your distributions.

Due to changes to federal law that took effect on January 1, 2023, the age at which you must begin taking RMDs differs depending on when you were born.

If you haven't reached RMD age, you can skip this step. But if you have, you're now required to withdraw a certain amount from many types of retirement accounts so that you can start paying the taxes you've been deferring all these years.

Consider moving your yearly RMD amount into your money market fund—unless you don't need it to cover your expenses. If that's the case, you can move the money into any taxable account.

Just don't leave it in your retirement account. There are steep IRS penalties if you don't take your RMDs.

Find out how Vanguard can make your RMDs automatic

GOOD TO KNOW!

If you don't need your RMDs, you can consider converting some of your traditional IRA or 401(k) assets to a Roth IRA, which isn't subject to RMD rules.

Find out more about Roth conversions

3. Direct dividends and capital gains to your money market

As you were building your savings, you probably used your earnings to buy more shares of your investments—that's how you benefit from compounding.

But now that you're spending money from your accounts, consider having your earnings sent to your money market fund rather than reinvested, at least in your taxable accounts.

Here's why: You'll incur taxes on these gains when they're paid out. If you reinvest them and then turn around and withdraw them in a few months, you'll likely have to pay taxes on them again.

4. Withdraw money from your accounts in this order

If your taxable distributions and RMDs (if any) aren't enough to cover your spending, withdraw additional money from your savings in a way that will allow you to pay the majority of your taxes while you're in a lower tax bracket.

That's sometimes easier said than done, but for many people, the order below will make the most sense.

Withdraw from your taxable accounts first. This will allow your accounts with tax benefits to keep growing as long as possible. Remember that as you sell assets in these accounts, offsetting your capital gains with losses will help keep your taxes down.
When you've spent all the money in your taxable accounts, begin withdrawing from your tax-deferred accounts, like traditional 401(k)s and IRAs.
Finally, withdraw from your tax-free accounts like Roth 401(k)s and Roth IRAs. If you don't use all your Roth money, you can include it in your estate plan, since Roth accounts keep many of their tax advantages even after being passed down.

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*Due to changes to federal law that took effect on January 1, 2023, the age at which you must begin taking RMDs differs depending on when you were born. If you reached age 72 on or before December 31, 2022, you were already required to take your RMD and must continue satisfying that requirement. However, if you had not yet reached age 72 by December 31, 2022, you must take your first RMD from your traditional IRA by April 1 of the year after you reached age 73.

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