R
etirement might mean more time
with the grandkids or long trips
abroad, but it won’t mean saying
goodbye to taxes. In fact, taxes on your
retirement withdrawals can have a major
impact on your savings—including
whether the money lasts as long as you do.
Yet according to a November 2018
poll by Kiplinger’s Personal Finance and
Personal Capital, more than half of those
surveyed said they had no withdrawal
plan. With that in mind, let’s look at
how having a tax-smart plan can make
a sizable difference.
XStart with the big picture
Most people have a variety of retirement
assets. Many have money in tax-deferred
savings accounts like IR As and 401(k)s.
Some may also have taxable invest-
ments, 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 pen-
sions or annuities.
Trouble is, not all withdrawals are
taxed at the same rate. And some assets
force withdrawals at certain age thresh-
olds, 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.
YQuestion conventional wisdom
It’s often said that retirees should with-
draw taxable assets first, followed by
tax-deferred savings. And sometimes
that’s good advice.
Let’s say a married couple retires at
65 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,
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http://www.personalcapital.com.Kyle Ryan, Executive Vice President, Advisory Services
PROFESSIONAL INSIGHTS FROM PERSONAL CAPITAL
ZAvoid ‘forced’ income^
Fast forward five years, when our couple
reaches age 70½. Let’s assume they
deferred their Social Security payments
until age 70 and will now receive $45,000
a year between the two of them. Sud-
denly they have Social Security income
and required minimum distributions
(RMDs) from their IR As 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.[The best plan is often a mix
Starting at age 65 and for every year
thereafter, our couple could instead
take $ 64,100 from their IR A ($ 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 % mar-
ginal tax rate and roughly a 5% effective
rate. So instead of enjoying five years
of 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 guess-
work out of your retirement withdrawals.
Available to investors who work with a
Personal Capital fiduciary professional,
it uses advanced tax forecasting to pre-
dict an optimal withdrawal strategy in
retirement. You’ll sleep easier knowing
you have a tax-smart plan in place.A ny 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.
“It’s important to
plan withdrawals for
a long horizon.”
15% , or 20 % , depending on total income.
But capital gains usually have a basis,
which is a portion of the gain that has
already 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 per-
cent capital gains bracket. No taxes due!
Suppose instead they withdraw cash
from a tax-deferred IR A, 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 with-
drawing from taxable assets first is the
smart move. But hold on ...Retirement Withdrawals
A Wrong Move Could Raise Your Taxes