Increase Wealth and Decrease Tax by Planning Your Tax-Deferred Withdrawals

Want to preserve more of your money while decreasing your exposure to tax? The best way to do that is by strategically planning how you withdraw money from your tax-deferred accounts like your 401K’s or Traditional IRA’s.

For most accounts - including savings accounts and investment portfolios - you are required to pay taxes during the year that you receive income (from interest or dividends, for example). But with a tax-deferred account, you put off the payable tax until you withdraw the money from your account. You're not taxed on the money you've earned in the account. Instead, you're taxed on the money you take out of it.

A savvy accountholder will time their withdrawals to reduce the amount of tax they owe and thus increase the amount of money they get to keep. They do this by withdrawing money during a year when their income is low (such as during a period of unemployment or retirement). This puts them into a lower tax bracket so they pay less tax on their withdrawals.

Compare this to someone who is earning six figures and withdraws money from their tax-deferred account. Because they are already in a higher tax bracket, their withdrawal adds more money to their taxable income.

The only time to consider taking the higher taxes is when you can put that money to work in an investment that will earn back far more than you expect to lose from the added tax. But, there are times when we don’t have a choice in taking money out of our retirement accounts. I am referring to the Required Minimum Distribution.

With a Traditional IRA or a 401K, one thing to consider is that at one point in your future, you will have to start taking money out of your retirement fund. This is referred to as the RMD or Required Minimum Distribution. Uncle Sam will not allow us to keep our money earning deferred interest forever! He giveth the tax deferred account and he taketh away our taxes. How? At age 70.5, or seventy and a half, you will be required to take a minimum amount out of your retirement accounts on an annual basis regardless of whether you are retired. How is that amount calculated? Well, the best way to find out your minimum distribution would be to check on IRS Publication 590, “individual Retirement Arrangements” (hard) or you can contact your IRA custodian/administrator and ask them (easy). The RMD rules also are enforced for other retirement plans such as the 403B, SEP IRA’s, and Basic Retirement Plans. Each has very specific rules so contact your retirement custodian/administrator and ask them about your specific situation.

You work hard for your money and saving for the future in a tax-deferred account is smart. Protect your wealth and reduce the taxes you owe by making sure your withdrawals coincide with times when you are in a lower tax bracket.

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Our next Financial Education Workshop will be taking place in our main office next week: 

Sept. 26^th 6:30pm – Credit Myths and Repair – Learn the top ten myths of credit management, how to access your credit report for free, and how to address information on your reports that is inaccurate, invalid, or out of date. Thousands of South Bay residents have benefitted from this workshop over the past five years. Please contact me to RSVP for the workshop. Gmeyer@meriwest.com or 408-365-6328.