Sponsored

Retirement WithdrawalsA Wrong Move Could Raise Your Taxes

Retirement might mean more time with the grandkids or long trips abroad, but it won’t mean saying goodbye to taxes.

Kyle Ryan, Executive Vice President, Advisory Services

Retirement might mean more time with the grandkids or long trips abroad, but it won’t mean saying goodbye to taxes. In fact, taxes on yourretirement withdrawals can have a major impact on your savings—including whether the money lasts as long as you do.Yet according to a November 2018poll by Kiplinger’s Personal Finance andPersonal Capital, more than half of those surveyed said they had no withdrawal plan. With that in mind, let’s look athow having a tax-smart plan can makea sizable difference.

1. Start with the big picture

Most people have a variety of retirement assets. Many have money in tax-deferred savings accounts like IRAs and 401(k)s. Some may also have taxable investments, such as mutual fund portfolios held in a brokerage account. Everyone will have Social Security income, and few of us are lucky enough to have pensions or annuities.

Trouble is, not all withdrawals are taxed at the same rate. And some assets force withdrawals at certain age thresholds, which will limit your options in later years. Moreover, your income tax bracket could change as you age. That’s why it’s important to plan withdrawals for a long horizon, not just annually.

2. Question conventional wisdom

It’s often said that retirees should withdraw taxable assets first, followed by tax-deferred savings. And sometimes that’s good advice.

Let’s say a married couple retires at65 and wants to spend $100,000 a year. They sell stock from a taxable account worth that amount. Because portfolio profits are considered long-term capital gains (on assets held for more than a year), they are taxed at zero percent, 15%, or 20%, depending on total income. But capital gains usually have a basis, which is a portion of the gain that hasalready been taxed. Assuming the $100,000 gain has a basis of $60,000,the couple would only owe taxes on $40,000—which falls into the zero percent capital gains bracket. No taxes due!

Suppose instead they withdraw cash from a tax-deferred IRA, and assume their marginal tax rate is 22% with an effective rate of nearly 14%. To get $100,000 in 2019, the couple would need to withdraw about $116,000, since that money is taxed as income. So it would appear that withdrawing from taxable assets first is the smart move. But hold on...

3. Avoid ‘forced’ income

Fast forward five years, when our couple reaches age 70½. Let’s assume theydeferred their Social Security payments until age 70 and will now receive $45,000 a year between the two of them. Suddenly they have Social Security income and required minimum distributions (RMDs) from their IRAs and 401(k)s. Suppose the RMD is $90,000, which “forces” a total income of $135,000—more than they want. Of course, they don’t need to spend all that money, but they do need to pay income tax on it, at an effective rate of roughly 11%.

So the couple avoided taxes for five years by living off capital gains. But for the rest of their lives, they’ll be handing Uncle Sam 11% to 15% of their income.

4. The best plan is often a mix

Starting at age 65 and for every year thereafter, our couple could insteadtake $64,100 from their IRA ($60,000 to spend plus $4,100 for taxes) and $40,000 tax-free from their stock portfolio. They get their $100,000 in cash, at a 12% marginal tax rate and roughly a 5% effective rate. So instead of enjoying five yearsof no taxes followed by a lifetime of 11% taxes, they get a constant annual tax of 5%. That’s better math.

Fortunately, tools such as Smart Withdrawal can help take the guesswork out of your retirement withdrawals. Available to investors who work with a Personal Capital fiduciary professional, it uses advanced tax forecasting to predict an optimal withdrawal strategy in retirement. You’ll sleep easier knowing you have a tax-smart plan in place.

Personal Capital offers free online financial tools, a mobile app and personal wealth management services. Learn more atwww.personalcapital.com.

Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital Corporation. Personal Capital Advisors Corporation is a registered investment advisor with the Securities Exchange Commission (“SEC”). SEC registration does not imply a certain level of skill or training. The content contained in this article is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. No representations, warranties or guarantees are made as to the accuracy of any estimates or calculations of the Smart Withdrawal tool.

This content was provided by Personal Capital. Kiplinger is not affiliated with and does not endorse the company or products mentioned above.

Most Popular

Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
The 12 Best Tech Stocks to Buy for 2022
tech stocks

The 12 Best Tech Stocks to Buy for 2022

The best tech-sector picks for the year to come include plays on some of the most exciting emergent technologies, as well as several old-guard mega-ca…
January 3, 2022
How to Know When You Can Retire
retirement

How to Know When You Can Retire

You’ve scrimped and saved, but are you really ready to retire? Here are some helpful calculations that could help you decide whether you can actually …
January 5, 2022

Recommended

Final Estimated Tax Payment For 2021 Is Due This Week
tax deadline

Final Estimated Tax Payment For 2021 Is Due This Week

The deadline for submitting your fourth and final estimated tax payment for 2021 is just days away, so get your payments in now.
January 16, 2022
Your Child Care Tax Credit May Be Bigger on Your 2021 Tax Return
Tax Breaks

Your Child Care Tax Credit May Be Bigger on Your 2021 Tax Return

Many families with young children will get a bigger tax credit for last year's childcare expenses. And more families will qualify for the credit, too.
January 13, 2022
When Are 2021 Estimated Tax Payments Due?
tax deadline

When Are 2021 Estimated Tax Payments Due?

If you're self-employed or don't have taxes withheld from other sources of taxable income, it's up to you to periodically pay the IRS by making estima…
January 12, 2022
23 IRS Audit Red Flags
tax returns

23 IRS Audit Red Flags

These actions and tax positions could increase your chances of the IRS selecting your return for audit.
January 11, 2022