When you retire, you will probably have several sources of income. These may include traditional individual retirement accounts (IRAs), Roth IRAs, pensions, 401(k) or 403(b) accounts, mutual fund and brokerage accounts, and Social Security. You’ll want to have a strategy for managing your income and withdrawing from your accounts that incorporates appropriate tax considerations.
You can take Social Security benefits as early as age 62, but you may want to consider waiting. If you start before full retirement age, you will receive a reduced benefit. And for each year you delay beyond full retirement age (up to age 70), you can increase your benefit as much as 8% (in addition to annual cost-of-living adjustments). The larger your Social Security benefit, the less money you will need to draw from your own portfolio.
A portion of your Social Security will be taxable, at ordinary tax rates, if your “provisional income” exceeds certain thresholds. Provisional income includes 100% of most types of income but only 50% of Social Security benefits. Maximizing your benefit amount may allow you to take less from other accounts, reducing provisional income and, potentially, the taxes payable on your Social Security.
Pensions and Retirement Accounts
Will you receive a pension? Those payments generally will be taxable to you at the same rates that apply to your other ordinary income, such as rental income or interest. Ordinary tax rates also apply to withdrawals from traditional IRAs, 401(k)s, and similar tax-deferred retirement accounts, except to the extent the withdrawals represent a return of after-tax contributions. Once you reach age 70½, you generally will be required to withdraw minimum amounts from these accounts each year to avoid penalties. Qualified withdrawals from Roth accounts are tax free, and you’re not required to take money from them during your lifetime.
Dividends and Capital Gains
“Qualified” dividend income and long-term capital gains realized in taxable investment accounts receive favorable tax treatment. This income is generally taxed at 15%, although the rate can be as low as 0% for those in the 10% or 15% ordinary bracket or as high as 20% for those in the top 39.6% ordinary bracket.
Generally, you should consider withdrawing from taxable investments first and tax-deferred investments second. Why? You may be able to benefit from the favorable capital gains rates and give your tax-deferred investments more time to grow. Withdrawing tax-free money from a Roth account should generally happen last. However, every situation is different. We can help you develop a tax strategy for your personal situation.
Copyrighted property of Newkirk Products, Inc. Symmetry has been granted permission to reproduce a portion of this publication through our license agreement with Newkirk. Symmetry Partners, LLC does not provide tax or legal advice and nothing either stated or implied here should be inferred as providing such advice. The information is provided for educational purposes only. For additional information please visit www.ssa.gov and www.irs.gov/retirement-plans.
Symmetry Partners, LLC is an investment advisory firm registered with the Securities and Exchange Commission. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Symmetry Partners LLC), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.
Past performance is no guarantee of future results. As with any investment philosophy there is a possibility of profitability as well as loss.
Securities offered through Cambridge Investment Research, Inc., a broker-dealer, member FINRA/SIPC, and investment advisory services offered through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Both are wholly-owned subsidiaries of Cambridge Investment Research Group, Inc. Six8 Advisors LLC and Cambridge are not affiliated.