Comedian Tracy Morgan said it best: "What am I afraid of? The IRS. That's it. I don't want those people knockin' on my door, man."
Take Morgan's words to heart. You've spent years building up a nest egg, but the wrong tax moves can erode your wealth.
Here are time-tested strategies for withdrawing your hard-earned retirement cash.
Delaying Social Security
If you can afford it, you should delay claiming Social Security benefits. It's a common mistake to start too early.
Every year you put off claiming Social Security translates into an annual hike in benefits of 7% to 8%. Try to withdraw from your 401(k), Individual Retirement Account (IRA) or other savings first before tapping Social Security. It'll take discipline, but you can better leverage your Social Security payments if you wait.
When you start taking your monthly Social Security checks, consider if traditional IRA distributions will affect your tax bill. Those distributions count as taxable income and help determine whether your Social Security benefits should be taxed.
In 2016, a portion of those benefits is taxable when income exceeds $25,000 for single filers and $32,000 for joint filers. Because they're tax-free, Roth distributions don't count toward that income threshold.
Proper Estate Planning
Retirees who sell taxable assets with substantial unrealized gains will forfeit the advantageous boost in cost basis that their heirs would have received. In such a case, drawing first from a traditional or Roth IRA confers larger tax savings for heirs.
Generally, tapping a traditional IRA rather than a Roth is more desirable when a retiree's tax bracket is lower than the beneficiary's. Although the money in an IRA grows tax-free, contributions are taxed as ordinary income for you or your heirs.
The opposite is true for a Roth IRA, which you should tap first if your tax bracket is higher than the beneficiary's. Roths are funded with taxable dollars, which means the money is tax-free for both you and your beneficiary, but that benefit is more valuable for the person in the higher tax bracket.
Protecting Your Tax Breaks
If you retire before age 59.5, you should live on non-retirement plan savings, because early withdrawals from traditional IRAs and 401(k)s incur a 10% penalty in addition to being taxed as income. When you turn 59.5, you should rely on traditional IRAs and 401(k)s in your lower-income years, preferably before Social Security or a pension comes into effect, and withdraw non-taxable savings from a Roth IRA for those years when your income is higher.
Beware of a scenario that often surprises unwitting retirees: hefty withdrawals from a traditional IRA or 401(k) can generate unintended tax liabilities by hiking your taxable income high enough to preclude your eligibility for other tax breaks that you'd ordinarily have coming to you.