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Franklin Prosperity Report: Tax-Efficient Strategies for Drawing Down Retirement Accounts

By    |   Monday, 03 February 2014 04:25 PM

If you have several different retirement savings accounts, paying expenses during your retirement years isn’t as simple as spinning the proverbial wheel and picking one to withdraw from. The problem is the tax bite. With differing rules governing various savings vehicles, you can end up giving too much back to Uncle Sam, unnecessarily so.

Govt Prohibited From Helping Seniors (Shocking)

1. Tap the taxables first.

“If you’re retired and younger than 70½, then withdraw from your taxable accounts first,” advises Anthony D. Criscuolo, CFP with Palisades Hudson Financial Group in Fort Lauderdale, Fla. “Saving your taxable accounts for last will trigger a huge tax bill if you have to take all of them out at once to meet unexpected expenses.” Also, until the distribution requirement kicks in at 70½, “you want to be able to maximize the benefit of tax-deferred accounts because any interest, dividends, or capital gains generated within them is treated as current year income.”

2. Spend from your Roth last.

When it comes down to spending assets instead of simply the dividend or interest income they generate, Criscuolo advises spending taxable assets first as well. “Spend down non-Roth accounts first because Roth withdrawals are tax-free once the account has been open for five years or more,” he says. Criscuolo points out another reason to spend your Roth assets last: Roth accounts are a great asset to leave your heirs. This is because the investments they contain can continue to grow while distributions remain tax-free, unlike a regular individual retirement account that will require heirs to pay income tax on distributions.

3. Staying in a manageable tax bracket is also important.

This advice comes with a caveat: If you’re trying to remain in your current income tax bracket, it’s sometimes optimal to take some money from your taxable account, some from a traditional IRA, and some from a Roth IRA, because withdrawing from your Roth IRA doesn’t generate taxable income that could push you into a higher tax bracket, according to Michael H. Fliegelman, CLU, ChFC, AEP, RFC, of Swan Wealth in Durango, Colo.

“Tax rates may well rise,” Fliegelman says. “So you may avoid taxation today and by doing so actually incur more taxes, especially as most retirement accounts are subject to estate taxes too. The combination of the income and estate taxes could [cause] the account to lose 60 to 75 percent in value.”

Moreover, if you need maximum income from the account to live on, then tax considerations are secondary to other factors such as market risk, longevity, and healthcare costs. “Solutions for this include guaranteed lifetime income annuities, which remove the high cost of living long,” Fliegelman says. “People need to plan for longevity as well as taxes.”

Govt Prohibited From Helping Seniors (Shocking)

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