A tax-efficient withdrawal of assets in retirement means sequencing withdrawals from various types of investment accounts to pay the least amount of income tax that is legally required. Generally, this means tapping taxable accounts (i.e., money saved outside of tax-deferred plans such as 401(k)s and IRAs) first since they were funded with after-tax dollars and taxes have already been paid on their annual earnings. Another good initial source of money is tax-free assets, such as municipal bonds or bond funds, where no tax is owed. If possible, it is generally a good idea to wait until age 70 1/2 to tap your tax-deferred accounts. This keeps taxes postponed and retirement assets growing through the power of compound interest.
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