This is by far one of the most challenging financial areas to consider during your retirement transition phase.

Specifically, you have reached a point in your life where you are charged to determine how to withdraw monies from the various investment accounts that you’ve been diligently saving for your retirement.

Addressing the current retirement landscape requires a three-pronged approach:

  • Use more conservative projections for investment performance.
  • Have an honest conversation about saving and spending while working.
  • Create a solid spending plan when you retire.

If, during your retirement, producing the same income will require more assets, then you’ll need to save more while working.

Saving More Is a Struggle

Unfortunately, for many working families saving enough to maximize the contributions to their employer retirement plan is a big struggle—let alone saving additional monies on an after-tax basis.

The simple solution for those still working is to review living expenses and try and develop a plan to save first and then spend what is left over. Unfortunately, most do the opposite and therefore are unable to be prepared for retirement.

Government and Corporate Pensions

With that said, sometimes your decision has been made for you. In the case of government or corporate pensions, for example, the plans dictate when the distributions are to be made, which are usually set at a certain age or upon retirement.

Meanwhile, other types of corporate plans may include non-qualified plans. They allow the executives to defer additional earned income until retirement.

These plans also have requirements as to when monies need to be distributed. Generally, the executive must withdraw the balance over a five-year period upon retirement.

What About Social Security, IRAs and 401k’s?

When it comes to Social Security, IRAs, 401k’s, and other personal investment accounts, you can control the timing and amounts of the distributions. For example, IRA distributions can be started any time after age 59 ½ and must begin no later than the year you turn age 70 ½.

Social Security may be started as early as age 60 for widows and age 62 as an early start date for others needing to have income before ‘normal’ retirement age. Or, the start date can be deferred until age 70 to obtain a higher benefit.

Distribution Decisions Are Individual

The tricky part about distribution decisions is there is no one-size-fits all formula that everyone can apply to their transition phase. Back in the old days, the advice was simple: Defer everything and withdraw from only after-tax accounts first.

As much as following this recommendation is easy, it is far too simplistic for most people today. Unless, that is, you have no other choice, as would be the situation if you only have qualified retirement plans and have not saved up personal investment or savings accounts.

In fact, in some cases, it may be more beneficial to start withdrawing from IRAs earlier and defer withdrawing from after-tax accounts in order to preserve access to capital without having to pay taxes each time you need money.

In the end, your plan should address the needs of you and your family’s particular circumstances.

Distribution Fundamentals

Although you shouldn’t follow a cookie-cutter distribution formula, you should be familiar with the following distribution fundamentals:

Tax Issues

First, you should understand the various tax issues associated with each of your retirement distribution sources.

Income Tax Liability

Second, in order to experience the lowest overall income tax liability that will meet your income needs during retirement, you want to balance your taxable income with your non-taxable or tax-favored income.

If you have pension income, it is likely 100 percent taxable and not much can be done to reduce that liability.

If you also have a personal investment portfolio that you can draw upon, you might be able to supplement the pension without significantly increasing the income taxes. Dividends and interest can be either reinvested or withdrawn along with capital gain distributions.

I like having a money market account in which the dividends and interest are deposited, and the capital gains are then reinvested. This creates a cash resource to draw upon without additional tax liability that would be created if you needed to sell a position each time you wanted to make an additional withdrawal.

If you have IRAs, understanding the type of IRA and the RMD for each can also help in determining when to make withdrawals.

Note that in the event you have multiple IRA accounts, you only need to make the RMD from one IRA as long as the amount of the RMD is based upon the total value of all IRA accounts. And Roth IRAs have no “required minimum distributions.”

Medicare Premium

Third, it is important to understand that your Medicare premium is based upon the prior two years Adjusted Gross Income (AGI), which is shown at the bottom of the first page of the Federal 1040 tax return.

If you increase taxable distributions from retirement plans it may impact future Medicare premiums.

As you can see, how distributions relate to your transition phase is complicated. And making the right decision is essential to your long-term financial wellbeing.

Retirement Tip: My overall advice is to obtain professional help. A financial expert or an accountant may help you understand the various income tax issues associated with the timing of making withdrawals from all of your retirement distribution sources.

Do you know how to maximize your income and minimize taxes while preserving resources for your future financial wellness? Please join the conversation below and share any tips you have gained along the way.

Stan CoreyStan Corey is a CFP, ChFC and CPWA providing financial life management for more than 36 years. Stan has published a novel, The Divorce Dance, which is a story about a divorcing couple whereby the wife, Natalie, guides the reader though the divorce process and how to have a respectful divorce. Please visit his website.

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