Depending on the type of retirement account that you have, distributions can have huge impacts on your income.
If you have a Traditional account, distributions count toward your taxable income. Raising your taxable income in retirement can negatively impact other areas of your finances, such as:
For most people with Traditional accounts, they have the plan of slowly drawing money out over time. Where the real problem lies is when a crisis hits and you need a large amount of this money.
For example, we had a client who came to us with an emergency need for $50,000. While he needed it for himself, many times people come to us needing this money for their children or some other type of emergency.
Since he had a Traditional IRA, we had to actually take significantly more than $50,000 out of his account to pay the taxes. This in turn caused his income to increase by a large enough amount that his Social Security was taxed and he got a letter in the mail a few years down the road that he was going to have to pay IRMAA.
If this client would have had this money in a Roth account, it would have been easy to get this money out and he would have suffered none of the consequences. Roth accounts are a great source of tax free income in retirement.
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