If you are thinking about retirement, one of the questions that will pop up sooner or later is “How am I getting paid?”.

As you enter retirement, you may have a few different sources of “known income” such Social Security benefits or a pension. Along with those sources, supplemental income from your bank accounts, brokerage accounts, mutual funds, annuities, 401(k)s, IRAs, and Roth IRAs will likely be necessary to help you maintain your lifestyle in retirement.

So how do you which accounts to tap first for income? Well, the answer depends on a few factors.

First, consider your cash flow needs. Is the amount of income you need from your investments a consistent amount or are you just going take money on an as needed or ad hoc basis?

If you are going to take money each month in the same amount, you will want to set up a systematic withdrawal plan so that you can be sure that the amount of money and the timing of the deposit remains consistent with your budget.

On the other hand, if you are going to take money as needed, you need to make sure that the money will be available when you need it, so you are not caught scrambling at the last moment.

Next, you need to consider the tax implications for different types of accounts.

Cash coming from bank accounts has generally already been taxed as you’ve been paying taxes on the interest earned along the way. On the other hand, distributions from brokerage accounts could have taxes due on either long-term or short-term capital gains (i.e. the growth of your investments).

Annuities may have some income that is tax-free return of principal and some income that is taxed as ordinary income. Withdrawals from traditional retirement accounts like 401(k)s and IRAs are typically taxed as ordinary income, and withdrawals from Roth IRAs are generally tax-free.

While you might be inclined to minimize your taxes and only draw money from those accounts that will cost you the least in taxes, consider that it may be possible to reduce your long-term tax burden by taking money from each type of account in different proportions instead of simply taking money from the account that has the least amount of taxes to start.

Finally, it’s important to be mindful of required minimum distributions (RMDs). Once you reach age 72, the IRS requires you to take RMDs from your traditional retirement accounts each year (even if you don’t need the income). If you don’t take your RMDs on time, you could face significant penalties. So, make sure to factor in your RMDs when deciding from which account to withdraw.

In short, there is no one-size-fits-all answer to this question. It depends on your individual circumstances, including your tax situation, income needs, family situation, investment strategy, financial goals, and RMDs.

If you want help in figuring out where to draw your income in retirement, let’s get back to personal. Sit down with a financial planner who can help you map out a plan that works for your unique situation. And if you don’t have a financial planner, I’d be happy to help.

Wozny Capital Advisors, LLC and Stratos Wealth Advisors, LLC does not provide tax or legal services and the information should not be construed as such.  This information is not intended to be a substitute for specific individualized tax advice.  We suggest that you discuss your specific tax issues with a qualified tax advisor.  Consult an attorney or tax professional regarding your specific situation.