After retirement, you're likely to find your retirement savings include several different vehicles, which might include 401(k) plans, individual retirement accounts (IRAs), profit sharing plans, and taxable investments designated for retirement. When withdrawing funds, you must decide which order to tap those accounts. Withdrawing your funds in the most tax-efficient manner can add years to the life of your retirement funds. Typically, the most tax-efficient means to withdraw funds is:

  • First, withdraw funds from taxable investments designated for retirement. You don't pay taxes on your principal or on any dividends or interest, since you already paid taxes on those sums. Capital gains taxes will be due on capital gains, but as long as you've held the asset for over a year, that tax rate is a maximum of 20 percent in 2013 (up from a maximum of 15 percent in 2012, and a minimum of zero percent), which is likely to be lower than your ordinary income tax rate. The 20 percent capital gains rate only affects singles with taxable income above $400,000, married joint-filing couples with income above $450,000, heads of households with income above $425,000, and married individuals who file separate returns with income above $225,000.

    Capital gains on investments held less than a year are short-term capital gains and taxed at ordinary income tax rates of 10, 15, 25, 28, 33, 35, or 39.6 percent in 2013.

  • When deciding which assets to sell, first sell those with lower capital gains.

     
  • Next, make withdrawals from your tax-deferred investments, including 401(k) plans and traditional IRAs. If some of your traditional IRAs were funded with nondeductible contributions, withdraw those first, since a portion of your withdrawal won't be taxed. Withdrawals from these accounts are subject to ordinary income tax rates. Keep in mind that you will typically need to start taking minimum required distributions by age 70 1/2.
  • Last, use funds in your Roth IRAs. Since these funds grow tax free, let them grow as long as possible. You may even want to convert all or a portion of your traditional IRAs to a Roth IRA. Although you'll have to pay income taxes on the taxable portion when you convert, your funds will then grow on a tax-free basis. Since you aren't required to take minimum required distributions from a Roth IRA after age 70 1/2, this option may be more appealing to those who don't need the funds for retirement.

Of course, your specific situation may dictate a different method of withdrawal. For instance, it may make sense to use your tax-deferred accounts first if your assets have very large capital gains. Or, in years with low income, you might lose some of your itemized deductions and personal exemptions unless you use your tax-deferred accounts to recognize additional income. Individuals in high marginal tax brackets with large tax-deferred balances may find it makes more sense to spread out withdrawals from the tax-deferred accounts to minimize lifetime tax payments. 

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