What To Withdraw From And When To Maintain Your Wealth

Retirees are interested in preserving their wealth as long as possible

. But because different assets are taxed differently, sometimes yearly where required, the order in which you withdraw income from your assets can significantly affect how fast you'll deplete your wealth. So, in what order should you withdraw from each type of asset?

The assets you have for your retirement can generally be broken down as:

* pension income,

* Social Security income,

* savings and investments - composed of taxable investment, tax-deferred investments associated with IRAs, 401(k)s, etc and lastly tax-advantaged investments such as long term gain stock and real estate.

* home equity

To maintain your wealth as long as possible, maximize annual investment growth while minimizing annual taxation of income. Those investments that are tax-deferred ( and I assume have an equal investment growth scenario to taxable investments) will compound faster than those taxed investments that must forfeit some of their annual earnings to taxes every year. These latter investments compound more slowly due to that yearly tax loss.

Tax-advantaged investments like your home or those subject to capital gains can often present little or no taxation to you. For definition purposes, here, I define taxable investments as the one's that have no tax-advantages or tax-deferred character. They are typically your income investments like bank accounts, bonds, bond funds, and stock with high dividends - all of which generate year taxable income at income tax rates. They are the most heavily taxed earnings you have.

Based on these points, I now suggest which assets you may withdraw first or last to maximize annual growth and minimize your overall taxation.

Your pension income will be taxable as ordinary income. That income must be taken as it comes so there's nothing you can do about that.

Another source of income is your Social Security benefits. This is generally tax free if your other income stays under threshold amounts depending on your filing status; beyond that only 50% of it will be taxed. Try to hold off receiving your benefits until your full retirement age - probably 66 for most of you. You lose some 30% of benefits if you begin your benefits at age 62. Holding off 'til your 70 will credit you ~30% more in monthly benefits than what you'd get at 66.

Your IRAs and similar investments grow tax-deferred. This enhances their annual compounding capability - relative to those taxable investments yearly taxed. Anything you withdraw from them is taxed at ordinary income rates. So let them ride and withdraw only the minimum required distribution (MRD) amounts starting at age701/2 if possible.

Roth IRAs compound tax free, have no MRD requirements, and you can withdraw from them tax free. Don't touch them 'til last. They're also the best form of IRA for your beneficiary.

Your taxable investments - as I defined them above - will have their dividends or interest earnings taxed yearly. Withdraw from these first. Most anything withdrawn beyond the earning will probably be untaxed or taxed at low capital gains rates. That's there only benefit. Take advantages of any capital losses to offset taxes too. Because of these tax effects, these investments will deplete slower than withdrawing from tax-deferred investments - for the same amount withdrawn.

Use your home equity too. As a tax-advantaged investment, you can sell it and buy down to get at the excess equity at little or no tax since the home sale tax exclusions is $500,000 for a married couple.

by: Shane Flait

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