Tax-smart retirement withdrawals in any market cycle


A tax-efficient withdrawal strategy for retirement income may lessen your tax burden and help your retirement savings last longer — even throughout market cycles.

 

Determining your withdrawal rates

While you may have saved a fixed amount every month before retirement, withdrawing a fixed amount for income every month may not be the ideal option for retirees today. While a standard withdrawal rate of 4% annually — a popular concept for years — can help illustrate your options, a withdrawal rate personalized to your goals and changing needs may be more effective over the long term.

Costs related to your health, medical care and retirement activities, for example, will likely change year to year. Your advisor can help you re-evaluate your withdrawal amount every year, including the timing and income sources appropriate for your situation.

 

How and when to withdraw

How you choose to withdraw assets may vary over time. For example:

  • In years when your tax rate is higher, you might increase distributions from investments in tax-free accounts, such as a Roth IRA.1,2
  • In years when you have lower income, you might increase distributions from tax-deferred accounts like a traditional IRA2,3 or employer retirement plan.2 You will pay taxes, but potentially at a lower rate.
  • In years when you are considering selling an asset to take a long-term capital gain, you might work with your tax advisor to see if you can take some, or all, of the gain at the 0% tax rate.

 

Your advisor, with your tax advisor, can help you estimate your taxable income by adding up your income sources, such as:

  • Anticipated withdrawals from retirement plans and certain annuities
  • Social Security benefits (the taxable amount can vary)
  • Pension income
  • Investment income in non-retirement accounts, such as interest and dividends
  • Required minimum distributions (RMDs)

 

Other retirement account withdrawal options

Health savings account If you continue to work and are eligible for a health savings account (HSA), your earnings in your HSA can grow tax-deferred (contributions are subject to IRS limits). You can pay for qualified medical expenses with tax-free withdrawals from your HSA. Those medical expenses don’t have to be incurred in the year in which the withdrawal is made. Be sure to keep your receipts in case you decide to reimburse yourself from your HSA at some point in the future. Once you turn 65, withdrawals can be made for non-medical expenses without the 20% penalty, though taxes will be incurred.

Your contributions to an HSA are pre-tax, which reduce your taxable income during your working years. Annual contribution amounts are indexed for inflation annually. The contribution deadline for 2021 contributions is April 18, 2022 (April 19 for residents of Maine and Massachusetts).4

  • $3,600 contribution for individual coverage for 2021 ($3,650 for 2022)
  • $7,200 contribution for family coverage for 2021 ( $7,300 for 2022)
  • Individuals ages 55 and older can make an additional $1,000 catch-up contribution.

 

Qualified charitable distribution (QCD) — During retirement, consider the tax benefits of qualified charitable distributions (QCDs). If you are 70.5 years or older and would like to support a charity, you can make a QCD up to $100,000 directly from an IRA to a qualified charity. It works if you take the standard deduction or itemize deductions, and it can count toward your required minimum distribution, if you have one.

Before age 72, making QCDs results in your having a smaller IRA balance which will generate lower RMDs in the future. At age 72 and beyond, a QCD helps reduce your adjusted gross income (AGI) and taxable income for the tax year.

 

Create lasting retirement income

Your Ameriprise advisor can recommend retirement income strategies that are tax-efficient so that your savings can potentially last longer. They will also regularly revisit your goals and financial strategy to help you stay on track in any market environment over time.