Do You Have a Tax-Smart Withdrawal Strategy?

This week, Craig Siminski, of CMS Retirement Income Planning, shares an article discussing the tax treatment of different types of retirement accounts and the tax consequences of withdrawals, especially from multiple accounts:

Your plan for drawing down retirement assets could be just as important as your approach to accumulating retirement savings.

Experts recommend various methods, such as the so-called 4% rule — withdrawing 4% of your nest egg each year (with adjustments for inflation) — or a three-phase system dividing your assets into groups for short-term, mid-term, and long-term retirement needs.

Before you make any final decisions, it would be wise to consider the tax consequences of your withdrawal strategy. This could be especially tricky if you have multiple accounts subject to different tax treatments. Among the questions you might ask are:

(1) Do you want to pay taxes now or later?
(2) Should you keep certain funds pursuing growth as long as possible?
(3) Could taxable distributions push you into a higher tax bracket or affect the taxability of your Social Security benefits?

Here are some guidelines on the tax implications of various types of accounts:

Taxable Accounts, such as savings accounts, certificates of deposit (CDs), and investment accounts offer no special tax benefit for keeping funds in the account. Although interest and dividends are taxed annually, withdrawals are typically not subject to ordinary income taxes.

However, if you sell appreciated assets such as stock, they may be subject to capital gains taxes, which are generally lower than ordinary income tax rates but could still have a significant impact on your tax liability. There may be fees for certain withdrawals, such as early withdrawals from a CD.

Nonqualified Annuities — annuities that are not held in an IRA or a qualified plan such as a 401(k) — are generally purchased with after-tax money. As such, only the earnings portion of annuity withdrawals is taxed as ordinary income.

There are two ways to take money out of a nonqualified annuity — regular withdrawals and…

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Craig Siminski is a CERTIFIED FINANCIAL PLANNER™ professional, with more than 23 years of experience. His goal is to provide families, business owners, and their employees with assistance in building their financial freedom.

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