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Withdrawing From Your IRA for the First Time in 2024? Do This First

Once you reach the age of 59 1/2, you can take a withdrawal from an IRA without incurring a penalty. If you have a traditional IRA, you’ll owe some taxes on your withdrawal. If you have a Roth IRA, that withdrawal is yours to keep in full, as the IRS can’t tax you on it.

As of the third quarter of 2023, the average IRA balance across savers of all ages was $109,600, according to Fidelity. If you’re gearing up to withdraw from your IRA for the first time, ideally it’s because you’re officially retired. And hopefully, you have a larger balance than the typical American in Q3 of 2023.

But no matter what IRA balance you’re looking at, it’s important to think carefully before removing funds from that account. In fact, here’s an important step to take before you touch that money.

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Establish a withdrawal rate that works for you

Let’s say you’re going on vacation for a week and have brought along $750 in cash to spend on food, entertainment, and souvenirs. At that point, it’s pretty easy to figure out how money you should be spending per day — roughly $100, give or take.

When it comes to managing your IRA, things get a whole lot trickier. That’s because you have no idea how long your money needs to last, since you can’t see into the future and determine how long you’ll live.

It may be that you’re retiring at age 65 with an IRA worth $800,000. That’s a lot of money. But does it need to last 10 years? 15 years? 20? More? You have absolutely no way to know.

And that’s why it’s so important to come up with a withdrawal rate before you start to tap your IRA. You want to make sure that money lasts throughout your retirement — however long that ends up being.

Now, there are a couple of factors to take into account when coming up with your IRA withdrawal rate:

  • Your life expectancy
  • Your expenses

But wait — didn’t we just say you can’t predict your life expectancy? That’s still true. But a good rule of thumb is to anticipate needing money for 30 years. The exception may be if you have a known health condition that’s expected to shorten your lifespan, plus a family history that doesn’t exactly scream longevity. But even then, you could be an outlier — you never know. So 30 years is generally considered a safe bet.

Your expenses, meanwhile, should be an easier thing to get a handle on. Add up your monthly expenses, from housing costs to groceries, and see where you’re at.

From there, start with a reasonably conservative withdrawal rate and see if it does the job of covering your living expenses. For years, financial experts have said that a 4% annual withdrawal rate works well for the typical senior who wants their savings to last for 30 years.

So let’s say you’re sitting on an $800,000 IRA. At 4% a year, you get an annual income from savings of $32,000. And maybe you’re looking at another $23,000 a year from Social Security. That’s pretty much in line with the average annual benefit today. All told, you’re looking at $55,000 a year to live on.

If that works for your expenses, you have your withdrawal rate. If you need more money than that, consider a slightly higher rate. If you don’t need $55,000 a year, start with a lower rate. You can adjust that rate as you go, but the key is to have a plan.

Don’t just take money out of your savings at random

It can be tempting to tap your IRA to your heart’s delight if you’ve waited many years to be able to do so penalty-free. But remember, you worked hard to build your retirement savings. And you don’t want to see that money disappear on you in your lifetime. Come up with a withdrawal rate and stick to it, and that may be less likely to happen.

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