From taxable accounts you can elect to have your interest and dividends paid to you rather than reinvested. Image: Dim Dimich/Shutterstock.com
You likely have both tax-favored accounts and other types of accounts from which to draw in retirement to supplement your fixed income such as from your annuity or Social Security benefits.
You’ll probably want to tap your taxable accounts before age 72, when you’ll be required to take minimum required distributions (MRDs) from your IRA, TSP or other tax-advantaged retirement savings. Tapping your taxable accounts first provides you with valuable extended tax deferral.
From your taxable accounts, you can elect to have your interest and dividends paid to you, rather than reinvested. Those payments will count towards your portfolio withdrawals.
Say you expect to pull $16,000 (4 percent) from your $400,000 portfolio. That $400,000 is evenly divided between your IRA and your taxable accounts, so you’d be taking $16,000 from your $200,000 in taxable accounts.
Suppose interest and dividends from your taxable accounts total $5,000. Then you’d need to withdraw another $11,000: $16,000 minus $5,000.
That $11,000 would come from selling securities in taxable accounts. You could sell the securities that have appreciated the most–selling your winners while leaving the other holdings time to gain value.
The situation changes when you pass age 72 and have to take MRDs. Then you’d pull money out of your tax-deferred accounts. If you wanted to withdraw $20,000 that year, for example, and your MRD was $11,000, the other $9,000 would come from your taxable accounts.
You probably won’t follow the above example precisely but the concept is what counts.
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