When should physicians start withdrawing from retirement accounts?

By Naveed Saleh, MD, MS | Fact-checked by Barbara Bekiesz
Published January 12, 2024

Key Takeaways

  • A good-rule-of thumb is to first withdraw from taxable and tax-exempt accounts before tax-deferred accounts like an IRA or 401(k).

  • Required minimum distributions from tax-deferred retirement accounts are considered taxable income.

  • Withdrawals taken before the age of 59.5 years are considered “early,” and an additional 10% early penalty tax is levied by the IRS. This extra tax may be waived in light of certain specified hardships.

Retirement accounts make for long-term—but not indefinite—investments. Eventually, retirement funds make their way out of your account. 

Questions often arise about the best time for physicians to withdraw money from a retirement fund. A good rule-of-thumb is to first withdraw from taxable and tax-exempt accounts, such as a Roth IRA, followed by tax-deferred accounts such as traditional IRAs and 401(k)s.

In other words, you want to tap your traditional IRA and 401(k) accounts as a final measure. 

Minimum distributions explained

At the age of 72 (or 73, for those who turn 72 after December 31, 2022) it’s necessary to take withdrawals from an IRA, SIMPLE IRA, SEP IRA, or retirement plan account, per IRS rules.[]

Unlike traditional IRAs, Roth IRAs do not necessitate withdrawals be made until after the owner’s death. Beneficiaries of Roth IRAs, however, must follow required minimum distribution (RMD) rules. The RMD for any year is the account balance as of the previous calendar year divided by a distribution period taken from the IRS’s “Uniform Lifetime Table.” The RMD is considered taxable income by the IRS.  

There are generally two required distribution dates during the first year after age 72. The first is an April 1 withdrawal, followed by an additional withdrawal by December 31. Alternatively, a withdrawal can be made by December 31 during the year the owner turns 72. This move permits the distribution to be counted in a separate tax year.

Individuals who do not take any distributions, as well as those who withdraw amounts less than the RMD, may be subject to a 50% excise tax on the undistributed amount.

Additional withdrawals

When and how much to withdraw from your IRA is a personal decision. It requires sitting with your financial planner and figuring out how to make the most of your funds with minimal loss.

In general, you shouldn’t withdraw more than required per the RMD. If necessary, this should be used toward long-term care, according to Trey Fairman, senior wealth and insurance planning strategist at Millennium Brokerage Group, in an interview with the AMA.[]

Fairman stressed that before taking out more than the RMD, it’s important to speak with a tax planner to figure out whether there are other investments to sell. 

Ultimately, you don’t want to compromise the growth of a tax-deferred account over time. It is also much more tax efficient to take funds out of a non-IRA, where you pay only capital gains, compared with an IRA, where the withdrawal faces income tax.

Advice from Phillip James Financial echoes this guidance.[] According to an article on their website, “The absolute best place to take out money during retirement is from a taxable account and selling an asset with a loss. You not only receive the full selling price of the asset (no tax) but you create a capital loss that can offset other gains. This allows you to unload some other investments with gains at zero tax as well.”

Another reason to limit withdrawals from an IRA is that they can shift you to a higher tax bracket.[]

Hardship distributions

If you take an IRA withdrawal before the age of 59.5 years, the withdrawal is considered an early withdrawal by the IRS, and an additional 10% tax is imposed.[] 

In cases of hardship, it may become necessary to withdraw money before the age of 59.5. Examples of hardship for the owner or their heirs include the following:[]

  • Qualified home purchase

  • Qualified education expenses

  • Disability or death of the IRA owner

  • IRS levy on the plan

  • Medical expenses

  • Call to duty

Specific concerns for physicians

With the aging population, physicians have a special perspective on long-term services, including assisted living and living and residential care settings, which offer supportive care and housing to the elderly. Personal investment in such services varies.

Long-term care can cost a pretty penny, with the AARP citing monthly costs of $9,034 for a private nursing home room and $4,500 for a one-bedroom in assisted living, whereas a home health aide costs $5,148 per month.[]

Even so, there are more tax-friendly ways to fund long-term care, especially if funds are needed before age 72. Fairman suggested putting your RMD toward a charitable donation, as these are tax-deductible. Giving money to children or funding your grandchildren’s college education are also options. 

What this means for you

The government requires that owners of IRAs over age 72 take their RMD or risk a 50% excise tax. Beyond that, it’s probably a good idea to withdraw from your IRA as a last resort, and only when absolutely necessary. Instead, draw from non-IRA accounts if funds are needed “early,” or prior to the age of 59.5. Remember that non-IRA accounts may only require you to pay capital gains, which will be less than the income tax imposed on an IRA withdrawal. In cases of hardship, the 10% additional tax penalty attached to an early withdrawal from an IRA can be avoided.

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