Question:
Dear Dr. Don,
My husband and I are retired. If we need extra income, should we take it out of our Roth individual retirement account or out of our 401(k)?
-- Laura Longevity
Answer:
Dear Laura,
The choice of whether to first take money out of a tax-exempt Roth IRA or a tax-deferred 401(k) has been the subject of much thought by two of my colleagues, John Spitzer and Sandeep Singh. However as true academics, they caution that the application of their findings to real-life situations is often purely coincidental.
That doesn't mean we can't draw inferences from their work. Here is what they say:
If the assets in the two accounts -- the Roth IRA and the 401(k) -- are identical, and a constant tax rate is assumed, the order of withdrawal does not matter. The money should last the same number of years irrespective of where it is withdrawn from first. However, if the accounts are invested in different assets, then the money might last longer if money is withdrawn from the poorer-performing account first.
An important assumption is that the Roth IRA account has been funded for more than five years. The investment earnings of Roth IRA accounts that haven't seasoned for five years may be subject to income tax.
