Enjoy Lower Taxes-Withdraw from the correct accounts at the Right Time

Retired people are interested in conserving their capital as long as possible and this means lowering taxes. But because IRS imposes different tax rates on investments depending on how they are held and for how long they are held, the order in which you withdraw from your financial assets may substantially impact how fast you'll consume your capital and pay tax. Therefore, when must make distributions, in what order shoud you withdraw from various investments?

The asset buckets you have for your retirement may usually be broken down as:
• pension revenue,
• Social Security income,
• financial savings and investments - composed of
o taxable investment and
o tax-deferred purchases connected with IRAs, 401(k)s, etc,
• home equity

To preserve your wealth as long as possible, maximize annual investment growth while you lower taxes by using those funds with the lowest tax rate. Those investment strategies which are tax-deferred (IRAs, 401ks, annuities) - under an equal investment growth situation - will compound quicker than those taxed investments that must forfeit some of their annual earnings to taxes (bank accounts, bonds). These latter investments compound slower.

Tax-advantage investments like your home or those subject to capital gains can often present small or absolutely no taxation to you. Based on these factors, we suggest which assets you may withdraw first or last to maximize annual growth and lower taxes.

Your pension checks would be taxable as normal income. So that income must be taken as it comes and there's absolutely nothing you may do about it.

Another source of income is your Social Security benefits. This is usually tax-free in case your other revenue remains under threshold amounts depending on your filing status; beyond that, up to 85% of it may be taxed. However make an effort to extend the time of getting your SS benefits until your full retirement age - most likely 66 for most of you. You lose some 30% of benefits if you begin them at age 62. Moreover, holding off 'til your 70 will credit you about 30% more in benefits.

Your IRAs and comparable investments grow on a tax-deferred basis. This improves their yearly compounding capability. Everything you pull out from them is taxed at ordinary revenue rates. So to lower taxes, let them ride and pull out only the minimum required distribution (MRD) amounts starting at age70½ and nothing prior to that age of mandatory distributions.

Roth IRAs compound tax-free, have no mandatory distributions prerequisites, and also you can withdraw from them tax-free which means you wish to leave them alone as long as possible. Do not touch them 'til last. They are also the best type of Individual retirement account to be left to a beneficiary.

Your taxable investment funds would have their returns or interest earnings taxed annually. Withdraw from these first since you pay the required taxes in any case, whether you take withdrawals or not. Most anything withdrawn beyond the earnings will most likely be untaxed (i.e. return of principal) or taxed at reduced capital gains tax rates. Take benefits of any capital losses to lower taxes too (which means you need to sell your losing shares by December 31 of each year because you can purchase them back 31 days later anyhow). Because of these tax effects, these investments will diminish slower than pulling out from tax-deferred investments and help lower taxes.

Use your home equity also. As a tax-advantaged investment, you are able to sell it and purchase a less costly residence to get at the extra equity at little or no tax because the home sale tax exclusion is $500,000 for a married couple. Or, if age sixty-two or older, get a reverse mortgage which is non-taxable cash in your hands.

Here's your overview on ways to lower taxes by using your assets in the correct withdrawal order.

When To Withdraw From An Asset To Preserve Wealth
Asset	Taxation Status	When to Withdraw as source of income
Pension income	Taxable	Receive as distributed
Social Security	Not taxable below IRS social security tax threshold	Wait 'til full retirement age or hold off for higher benefits
IRAs, 401(k)s, etc	Taxable when distributed	Hold off 'till deplete taxable investments - just take MRD or convert to Roth IRA
Roth IRAs	Tax free growth and withdrawal	Hold off 'til last - best way to leave beneficiaries your IRA money
Taxable investments	Taxable yearly as dividends/interest or capital gain as sold	Distribute as needed before depleting IRA-type money
Home Equity	Capital gain/big exclusion when sold	Buy down for access to tax-free or minor taxed equity