What is it?
Withdrawal sequence is about how you should “tap” your retirement savings. It is identifying the proper order, appropriate account, specific holding and the right amount to liquidate from the assets you hold in your 401k, Traditional IRA, Roth, Annuity, CD’s etc…. There may be significant advantages to tapping more than one account at a time.
Why does it matter?
Not all retirement savings accounts are treated the same from a tax perspective. They may be “tax exempt”, “ tax deferred” or “taxable”. Your taxes will be impacted in different amounts based on how much and when you drawdown from these different accounts. You may benefit from tapping multiple accounts and specific holdings in those accounts.
How do people get it wrong?
Unfortunately, some people will draw from whichever account, whenever they want and ignore the implications – we call it the “Willy Nilly” strategy. Others may rely on a financial advisor who defaults to “conventional wisdom” which suggests you should tap and fully liquidate in this order: 1. Taxable 2. Tax Deferred 3. Tax Exempt. Sadly, this will expose the retiree to significant and unnecessary tax exposure. You can do better.