A lot has been written about saving and accumulating enough for retirement. But that’s only half the battle. Once you reach retirement it is important that you manage your retirement withdrawals from various accounts as tax-efficiently as possible. Taxes will likely be one of your biggest expenses in retirement.
A tax-efficient withdrawal strategy can be the difference between the retirement you’ve dreamed of and just scraping by.
Taxes on Withdrawals – The Basics
Check that. There is actually nothing “basic” about retirement withdrawals. Here is a list of the key rules:
Traditional Accounts: All distributions from IRAs, 401(k)s, 403(b)s and 457 accounts are subject to income taxes at ordinary income tax rates, except Roth accounts (assuming all requirements are met) and any funds contributed on an after-tax basis.
Roth Accountss: Withdrawals from Roth IRA and 401(k) accounts are tax-free if certain requirements, such as the five-year rule and reaching age 59 ½, are met.
HSAs: Withdrawals from a health savings account (HSA) are not taxed if they are used for qualified medical and related expenses.
Social Security: Social Security payments may be subject to income taxes if your overall income is over a certain threshold.
Pensions: Pension payments are usually taxable. In some cases, a pension from the state or a municipality will not be subject to state income taxes. If you are receiving a pension from this type of employer check the rules for your state.
Appreciated Assets: Selling appreciated assets in a taxable account can result in long-term capital gains if they are held longer than one year. These gains are taxed at preferential capital gains rates. Short-term gains are taxed as ordinary income.