Tax-favored retirement accounts have been the most useful tool for successful retirement investors setting aside their savings. After working so long to build up their retirement accounts, many retirees are loath to start spending them down. But one retiremenet-income spending strategy that seems counterintuitive at first can actually save you thousands in taxes during your retirement years.
In the following video, Dan Caplinger, The Motley Fool's director of investment planning, looks at this unorthodox strategy to help you assess whether it's right for you. Dan notes that after spending decades taking advantage of tax deferral on IRAs and 401(k)s, most taxpayers wait as long as possible to start tapping their retirement accounts. But Dan points out that after you stop working, your tax bracket often falls dramatically, making it a lot less expensive from a tax standpoint to take distributions from retirement accounts. By contrast, waiting leaves you with more money to withdraw when IRS required minimum distributions kick in, and the resulting influx of more income can raise your tax bracket and cost you more in the long run. Even if you don't need the money, reinvesting it in taxable accounts using SPDR S&P 500 (NYSEMKT:SPY), Vanguard Total Stock Market (NYSEMKT:VTI), or other low-cost ETFs can be a smart choice.
Fool contributor Dan Caplinger and The Motley Fool have no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.