Countdown
to Retirement
According
to a recent survey, three out of four U.S. workers are able to make pre-tax
contributions to an employer-sponsored retirement savings plan. And half of
workers have accumulated other savings or investments in addition to retirement
assets.¹
It's not
uncommon for retirees to have income from multiple sources. The order in which
these assets are accessed for retirement income is important. It can influence
your tax burden and potential returns throughout your retirement years.
When
your last day of work is over, will you know which assets to tap first to help
make sure that your money lasts as long as possible?
Tax-Deferred
Retirement Plans
A good rule of thumb is to pay Uncle Sam last.
Tax-deferred accounts, such as employer-sponsored retirement plans and
traditional IRAs, require that you begin taking required minimum withdrawals at
age 70½, but taxes are due only on the amount withdrawn.² Leaving these
accounts untouched as long as possible allows them to continue pursuing
tax-deferred growth.
Fixed
Annuities
Annuities typically are funded with after-tax contributions, but they have two
tax advantages that are important to retirees.³ First, the funds accumulate tax
deferred, and any earnings are taxed upon withdrawal. Second, there is no
federal law requiring distributions from an annuity. The timing and amount of
withdrawals are typically controlled by the account owner.
Other
Investments
Liquidating highly appreciated assets early in
retirement can help rebalance your portfolio and provide income. Of course, you
may incur capital gains taxes when selling appreciated assets, but you may be
able to carry forward excess losses from previous years to help offset gains.
Understanding
the importance of how to spend retirement assets is a good first step toward
helping to make your retirement what you envisioned. Be sure to consult your tax
advisor regarding your specific situation.
1) 2003
Retirement Confidence Survey, Employee Benefit Research Institute
2) Distributions from these plans are taxed as ordinary income and, if taken
prior to reaching age 59½, may be subject to an additional 10 percent federal
income tax penalty.
3) Most fixed annuities have surrender charges that are assessed during the
early years of the contract if the contract owner surrenders the annuity. In
addition, if you surrender the contract before age 59½, you may be subject to a
10 percent federal income tax penalty. The guarantees of fixed annuity contracts
are contingent on the claims-paying ability of the issuing insurance company.
