Deciding how much to withdraw from retirement accounts is crucial for balancing enjoyment and financial sustainability. Taxes play a significant role in determining how much you can spend. A 67-year-old with $870,000 in a 401(k), $120,000 in an IRA, and $26,400 annually from Social Security can create a withdrawal plan based on different rates.

401(k) and traditional IRA contributions are pre-tax, but withdrawals are taxed as ordinary income in retirement. In contrast, a Roth IRA is funded with after-tax dollars, making withdrawals tax-free in retirement. Traditional IRA withdrawals are counted as taxable income due to their pre-tax nature, taxed at ordinary income rates.

Required minimum distributions (RMDs) start at age 73 for pre-tax retirement accounts like 401(k)s and IRAs. The withdrawal amount is based on the account balance and IRS Uniform Lifetime Table factors. RMDs ensure that retirees withdraw money from pre-tax accounts and pay taxes on it, especially critical for those with multiple accounts.

Creating a withdrawal strategy aligns spending with sustainable withdrawals after taxes. Different withdrawal rates impact taxable income and Social Security taxation. For example, a 5% withdrawal rate may result in approximately $72,000 after taxes, while an 8% rate could yield around $97,000. Balancing spending power and savings depletion is crucial.

Research suggests sustainable withdrawal rates between 3.5% and 4% for a 30-year retirement horizon. Balancing portfolio returns, spending needs, and tax treatment is key to determining after-tax income, likely ranging between $70,000 and $97,000 annually.

Taking into account taxes and required minimum withdrawals is vital when building a retirement budget. Consider not only the amount of withdrawals but also how much of those withdrawals remain after taxes. Seeking a financial advisor can help tailor a comprehensive plan to meet your retirement goals effectively.

Planning for state and local taxes, especially in states that do not tax retirement income, is a strategic move to maximize retirement withdrawals. Consider these factors when crafting your retirement budget for a secure financial future.

Read more at Yahoo Finance.: I’m 67 With $870k in a 401(k), $120k in an IRA and a $2,200 Social Security Check. What’s My Retirement Budget?