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Having ample funds to fully enjoy your golden years is an essential component of a successful retirement. That’s why it’s vital to understand the tax implications of your nest egg, and the optimal times to access certain accounts.

Even though you may be in a lower tax bracket in retirement due to no longer receiving a full salary, you may still have to pay income taxes on withdrawals from Social Security benefits, pension payments, and retirement and investment savings accounts. With that in mind, be sure to develop a solid withdrawal strategy before retiring so you can make the most of your golden years while minimizing the effects of taxes on your income.

A financial professional can help you choose the best strategy that will provide you with the necessary income to cover your expenses throughout your retirement, while keeping your investment portfolio diversified and tailored to your unique situation.

Following are four different withdrawal strategies for you to consider:


  • Take Advantage of Lower Capital Gains Rates

This is good news for many Americans: In 2015, taxpayers in the 10% and 15% income brackets can realize long-term capital gains or receive qualified dividends without being taxed. The 15% bracket is capped at a taxable income of $74,900 for married couples filing jointly. This means if your taxable income falls into one of the two lowest tax brackets, then selling stocks you’ve held longer than a year could be an extremely tax-friendly way to boost your retirement income.

Note: this strategy makes the most sense if you have a fairly high proportion of retirement assets in taxable accounts and a lower amount of recurring annual income, such as annuities, pension, or Social Security.

  1. Avoid Having Withdrawals Move You Into a Higher Tax Bracket

We all know a certain level of income equals increased taxes, so how do you avoid letting your retirement withdrawals bump you into that higher bracket? One strategy is to take withdrawals from taxable, tax-deferred, and possibly Roth accounts all at the same time.

If you do decide to go this route and manage your taxable income with a particular target marginal tax rate goal, there are several steps involved in the process. A financial professional can help guide you smoothly through it–from identifying your expected income, living expenses and income gap; to choosing a marginal tax rate you’d like to target; and withdrawing the appropriate amount of additional taxable income without affecting that chosen rate.

  1. Lower Social Security Taxes

Like the above strategy, this one also involves actively managing your distribution strategy.

Up to 85% of your Social Security benefits are taxable according to the government, which uses a formula that accounts for your other income sources, plus half of your benefits. The end goal of this strategy is to manage your income so a smaller percentage of your Social Security benefits will be taxable. This strategy is accomplished in a similar fashion to strategy #2, with a couple exceptions. Talk with a financial professional to configure the details according to your situation.

  1. Consider a Simple Retirement Withdrawal Formula

According to financial experts, the most basic withdrawal strategy is to take assets from your retirement and savings accounts in the following order:

  • Minimum required distributions (MRDs) or required minimum distributions (RMDs) from retirement accounts
  • Taxable accounts
  • Tax-deferred retirement accounts, such as a traditional IRA, 401(k), 403(b), or 457
  • Tax-exempt retirement accounts, such as a Roth IRA or Roth 401(k)

Advantages of this approach:

  • Ensures you take MRDs at the correct age so you’re not penalized.
  • Withdrawing investments you’ve held longer than a year will be taxed at lower, long-term capital gains rates.
  • Using taxable assets for retirement withdrawals leaves your money in tax-advantaged accounts, where it has the potential to grow tax deferred over time.
  • Qualified withdrawals from Roth accounts won’t be taxed, making them a useful vehicle later in retirement, or for heirs who inherit them.

Potential disadvantage: Your tax burden may increase when you start taking money from tax-deferred retirement accounts. See strategy #2 if you feel this may apply to you.

Bottom line: While these strategies give a good idea of some basic retirement withdrawal concepts, it’s important to consult with a financial professional before deciding which approach is appropriate for your situation.


Author Ron L. Brown, CFP®

Ron is a CERTIFIED FINANCIAL PLANNER™ and President of R.L. Brown Wealth Management. He specializes in retirement, estate, and business planning for professionals and entrepreneurs. Ron assists his clients with creating a financial plan to ensure they are able to live their ideal lifestyle during retirement and leave a strong legacy for their family. Ron has been featured in The Wall Street Journal, US News, Yahoo Finance, Investopedia, and numerous other high profile financial publications.

More posts by Ron L. Brown, CFP®
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