Use High Income Investments In Your Iras For Retirement Income

The tax-deferred and tax-free nature of IRAs makes high income investments attractive for retirees especially if they're looking for income to live on

. Here's why.

Income-based investments like bonds, bond funds, CDs, or income generating equities like preferred stocks offer yearly income you can count on. They are often a safe investment too depending on their ratings. But tax treatment of income-based investments often undermines there attractiveness because those earning are taxed yearly. Fortunately that's where IRA accounts holding such investments can help out.

Traditional IRAs defer taxation on earnings of investments within their accounts until you withdraw money from those accounts. At which time, you pay income tax rates on whatever you withdraw. Roth IRAs forego all taxation of earnings while held and even when withdrawn.

So holding income-based investments within IRA accounts allows their earnings to compound undiminished by yearly taxation.

This favorable tax treatment of IRAs allows their account values to increase more reliably on a yearly basis than perhaps equity growth stocks. And year in and year out investment growth is what is so powerful under the principles of compounding and time.

Retirees who need to withdraw from their savings to supplement their retirement income from Social Security benefits and pensions certainly should have income-based investments that are reliably generating that income - and more. Ideally, they should have enough income-based investments to allow them to live off just their total annual earnings - or less. Lastly, those investments should be held in both their IRA accounts and normal taxable accounts.

*Need to live off income from savings - before age 70 1/2

If you're under 70 1/2 years old, you're not obligated to withdraw any money from your traditional IRA accounts. So, don't withdraw income from them but let those investment earnings continue to earn and compound. That way they won't contribute to any current taxable income.

Take your needed savings income from income-based investments in your taxable accounts since their earnings will generate taxes anyway. But, if you must take some from your IRAs take what you need only after you take as much as you can from your taxable accounts to minimize your annual loss to taxation.

*Need to live off income from savings - after age 70 1/2

After reaching 70 1/2, you must annually make a minimum required distribution (MRD) from your traditional IRAs. Try to take just this yearly minimum so you let the remaining earned income in those account continue to compound.

Roth IRAs never require you to make any MRDs. But still minimize withdrawing money from them since their tax free growth of their earnings makes them an advantage over your taxable accounts.

Allow your taxable accounts to deplete first. But leave a residual amount in them for, say, 6 months emergency cash.

*The balance of your taxable investments

Any excess investments in your taxable accounts that aren't needed for your yearly income needs should be oriented to equity growth investments. That's because you've satisfied your 'income needs' from your RMDs and the taxable earnings of your high income taxable investments. Gear the remaining portion of your taxable investments to long term growth investments that trigger no or low taxation per year.

Be sure to buy reliable equity growth stocks to help increase the value of your taxable account over and above inflation. Since you're not counting on them for current income, you can afford more risk of loss for the higher growth rates that some long term equity investments can offer. And when you do cash them in for later use, you'll pay only the lower long term capital gains tax rates.

by: Shane Flait

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