Retirement Account Strategy: Orchestrating Your 401(k), IRA, and Savings
An orchestra is merely a collection of instruments, each creating a unique sound. It’s only when a conductor leads them that they produce the beautiful music the composer imagined.
The same is true of your retirement account strategy.
A typical retirement strategy rests on three pillars:
- Your 401(k) plan
- Your Traditional IRA
- Your taxable savings
Getting these pieces of your 401(k) and IRA strategy to work together — rather than in isolation — can help you move closer to the retirement you envision.
Hierarchy of Savings: Where to Direct Your Money First
A strong retirement savings strategy starts with understanding the hierarchy of savings.
Most people can’t save an unlimited amount for retirement, so it helps to direct savings toward the highest-priority options first. For many people, that order looks like:
- 401(k) — often first, especially if an employer match is available
- Traditional IRA — next priority after maximizing 401(k) benefits
- Taxable savings — used after tax-advantaged accounts are funded
How to Invest Across Each Account
Once your savings hierarchy is set, you’ll want to decide how to invest within each account. Two common approaches:
- Mirror your asset allocation across all accounts, keeping the same investment mix in each one.
- Split by asset type — place income-generating assets, such as bonds, in tax-deferred accounts, and use taxable accounts for assets whose growth comes from capital appreciation, such as stocks.
Asset allocation is a strategy to help manage investment risk. It does not guarantee against investment loss. Similarly, bond values fluctuate with interest rates — as rates rise, existing bond values typically fall. Holding a bond to maturity generally returns the original principal plus interest, barring issuer default. Stock values also fluctuate with market conditions, and shares may be worth more or less than their original cost when sold.
Retirement Account Withdrawal Strategies
A tax-efficient retirement strategy doesn’t stop at saving and investing — it also requires coordinating how and when you withdraw funds.
There are a few common approaches to retirement withdrawal strategy:
- Taxable accounts first — Withdraw from taxable accounts before tax-deferred accounts, giving tax-deferred savings more time to potentially grow.
- Weakest performers first — Draw from your lowest-performing retirement accounts first, since that money isn’t working as hard for you elsewhere.
- Tax-rate-based approach — If you hold both Traditional and Roth IRAs, your expectations about future tax rates can guide which account to tap first.
Roth IRA Withdrawal Strategy vs. Traditional IRA Withdrawal Strategy
If you expect tax rates to rise in the future, you might withdraw from your Traditional IRA withdrawal strategy first and preserve your Roth for later. If you’re uncertain about future rates, one approach is to:
- Withdraw from the Traditional IRA up to the top of your current, lowest applicable tax bracket
- Withdraw from the Roth IRA after that point
This Roth IRA withdrawal strategy can help manage your tax bracket year to year while preserving tax-free growth in the Roth for longer.
Every individual’s situation is different. Any withdrawal strategy should reflect your personal risk tolerance, time horizon, and retirement goals — a Southwest Florida financial professional familiar with your full financial picture can help you weigh these approaches.
Frequently Asked Questions
What is a retirement account strategy?
A retirement account strategy is a coordinated approach to saving, investing, and withdrawing from accounts like a 401(k), Traditional IRA, and taxable savings — designed to work together toward your retirement goals rather than being managed separately.
What is the hierarchy of retirement savings?
Many people prioritize contributions in this order: first the 401(k) (especially to capture any employer match), then a Traditional IRA, and finally taxable savings accounts.
When do I have to start taking required minimum distributions (RMDs)?
Under current IRS rules, most people must begin taking required minimum distributions from a 401(k), Traditional IRA, or other defined contribution plan starting at age 73 (this age was updated under the SECURE 2.0 Act and is scheduled to rise to 75 for individuals born in 1960 or later). Withdrawals are taxed as ordinary income, and withdrawals taken before age 59½ may be subject to a 10% federal tax penalty, with certain exceptions such as death or disability.
Should I withdraw from my Traditional IRA or Roth IRA first?
It depends on your expectations for future tax rates. If you expect rates to rise, withdrawing from the Traditional IRA first may make sense. If you’re uncertain, a common approach is to withdraw from the Traditional IRA up to the top of your current tax bracket, then shift to Roth withdrawals.
Are Roth IRA withdrawals tax-free?
Roth IRA earnings can be withdrawn tax-free and penalty-free if the withdrawal meets a five-year holding requirement and occurs after age 59½ (or under certain other circumstances, such as the owner’s death). Roth IRA owners are not required to take minimum annual withdrawals during their lifetime. Note that Roth IRA contributions are subject to income limits.
Important disclosures: Under the SECURE 2.0 Act, required minimum distributions from a 401(k), Traditional IRA, or other defined contribution plan generally must begin at age 73 (rising to 75 for individuals born in 1960 or later). Withdrawals from these accounts are taxed as ordinary income, and withdrawals taken before age 59½ may be subject to a 10% federal income tax penalty, with exceptions including death and disability. Contributions to a Traditional IRA may be fully or partially deductible depending on individual circumstances.
Asset allocation is an approach to help manage investment risk; it does not guarantee against investment loss. The market value of a bond will fluctuate with changes in interest rates. As rates rise, the value of existing bonds typically falls. If sold before maturity, a bond may be worth more or less than its original purchase price; holding a bond to maturity generally returns the original principal plus interest, barring issuer default. Investments seeking higher yields typically involve greater risk. The return and principal value of stocks will fluctuate with market conditions, and shares may be worth more or less than their original cost when sold.
Roth IRA contributions are not available to taxpayers above certain income thresholds. To qualify for tax-free and penalty-free withdrawal of earnings, Roth IRA distributions must meet a five-year holding requirement and generally occur after age 59½ (or under certain other circumstances, such as the owner’s death). The original Roth IRA owner is not required to take minimum annual withdrawals.
This content is developed from sources believed to be accurate. It is not intended as tax or legal advice and may not be used to avoid federal tax penalties. Please consult a legal or tax professional regarding your specific situation. Opinions expressed are for general information only and should not be considered a solicitation for the purchase or sale of any security.
