The Wall Street Journal
Encore – June 14, 2014
When Tapping Retirement Funds, Timing Matters
Sequence Influences How Much You Keep and How Much You Pay in Taxes
By Tom Lauricella
For retirees, not all savings are created equal. When retirees get ready to draw down their nest eggs, few realize that the order in which they tap their accounts influences how much they keep and how much they pay in taxes.
Increasingly, people retire with more than one type of investment or savings account. There are taxable accounts, such as a regular brokerage account or bank account. Then there are tax-deferred savings, like 401(k) plans and traditional individual retirement accounts. There are also Roth IRAs, which allow withdrawals tax free.
Underlying the tax questions is a fact that many retirees either forget, or don’t realize, until it’s too late: They pay income tax on money pulled from traditional IRAs and 401(k)s.
Roth IRAs, which are funded by after-tax contributions, should generally be last in line for withdrawals. Because withdrawals from Roths are made free of both income and capital-gains taxes, it makes sense to allow money to grow as long as possible in those accounts.
Comments June 15, 2014
Although long-term capital gains are subject to attractive 0% to 20% capital gains rates, short-term capital gains are subject to traditional income tax rates. In addition to capital gains taxes there is the dreaded 3.8% net investment income tax (“investment surtax”).
Poor portfolio construction could result in a negative tax domino effect – an investment that generates income (e.g.: bond interest, REIT dividends) in the wrong account that pushes you into a higher income tax bracket and subjects you to the investment surtax.
Fortunately, there are solutions to avoiding required minimum distributions from IRAs and retirement plans at age 70 ½. When implementing an investment and withdrawal strategy, work close with a privately owned Registered Investment Adviser (RIA) that is legally obligated to place your interests before her or his employer’s best interests and its shareholders.
Aaron Skloff, AIF, CFA, MBA
CEO – Skloff Financial Group
Aaron Skloff, Accredited Investment Fiduciary (AIF), Chartered Financial Analyst (CFA), Master of Business Administration (MBA), is the Chief Executive Officer of Skloff Financial Group, a Registered Investment Advisory firm. The firm specializes in financial planning and investment management services for high net worth individuals and benefits for small to middle sized companies. He can be contacted at www.skloff.com or 908-464-3060.