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MARK BLACKWELL — Accessing retirement funds



For many, finally achieving retirement signifies passing from years of toil and diligence to a more carefree lifestyle.  When it comes to making the most of your money, though, your retirement celebration may mark the end of some considerations, but it marks the beginning of many more.  Managing the allocation of your investment accounts and having a plan to minimize taxes while taking distributions from each of your accounts to fund your retirement are two of those considerations.

Portfolio allocation is one issue that may need to be addressed differently in retirement than in the years in which the portfolio was accumulated.  Many recent retirees and those approaching retirement believe that long-term growth vehicles are no longer appropriate in their portfolio and that each component of their investment plan needs to be directed toward income production.  A recent retiree at age 65 will, on average, live another 20 years for females or 18 years for males, based on current lifetime expectancy tables.  Since equities have tended to significantly outperform fixed-income investments in similar long-term investment periods, growth investments continue to be an appropriate investment choice for many retirees.  On the other hand, equity investments bring with them a higher degree of volatility than most fixed-income investments.  If an individual’s early retirement years are marked by sharp declines in the stock markets and the retiree needs to continue to withdraw funds from retirement investments to pay the bills, he or she may diminish the portfolio to a level that will be difficult to recover from, even when the markets return to their previous levels.

Where a younger investor may be able to ride out the occasional market declines, the retiree needs to balance the long-term return potential of stocks with their potential for significant declines in determining how much of an allocation to growth is appropriate.

Another new consideration for the recent retiree is from which account to begin taking distributions.  Many people retire with a taxable investment or savings account, a 401(k) plan, and an Individual Retirement Account.  In general, it makes sense to take the earliest distributions from the taxable accounts, allowing the retirement accounts to continue to grow tax-deferred (or tax-free in the case of Roth IRA accounts).  In taking distributions from the taxable accounts, if any securities are to be sold, avoid or delay taxes by selling long-term gains where possible, offset gains with losses, and try to delay sales until the beginning of the new year.

Where net gains have been realized, taxes have to be paid, but limiting the tax bill while allowing other retirement assets to continue to grow tax-deferred can help extend the retirement income provided by the portfolio.

Of course, taking distributions cannot be delayed forever.  Traditional Individual Retirement Accounts require distributions the calendar year after the owner of the account turns 70-1/2.  The penalties for not taking a required minimum distribution or for not distributing enough are punitive, and they are in addition to other income taxes due.  The calculations may be complex, especially where spouses and multiple retirement accounts need to be considered, so counsel with an experienced financial professional is recommended.

Another consideration for some retirees who have company stock in their 401(k) is whether to roll that stock into their IRA or to take the stock outright as a distribution.  In the first case, any future distributions will be taxed as income.  If the company stock has appreciated significantly, it may make sense instead to remove the stock from the 401(k), place it into a taxable investment account, and realize capital gains when the stock is sold.  Since long-term capital gains are taxed at about half of the top income bracket, the savings may be significant.

The tax considerations of saving for retirement are complex when one considers the various savings vehicles; the diverse tax structures of each; maximum contribution amounts; deductibility rules; and potential penalties of early withdrawals.  The rules covering regular distributions from those plans when one achieves retirement are no less complex.  The effort is worthwhile, though, as every dollar saved in taxes through a well-designed distribution plan is a dollar that can go towards food, healthcare, travel, and the rest of the costs of your retirement goals.

» Mark Blackwell is a Certified Wealth Strategist® and the Mississippi Area Executive for Regions Private Wealth Management.  He can be reached at mark.blackwell@regions.com. 


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