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.

Social Security

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.

Withdrawal Order

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.


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