Tax-smart retirement withdrawals in any market cycle


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Key Points

  • With a strategic approach to retirement income withdrawals, you could reduce your overall tax burden during retirement.

  • A tax-efficient withdrawal strategy may also extend the life of your retirement savings across market cycles.

  • Your Ameriprise advisor is here to help with your options for retirement income.

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

The how and when

Where you withdraw assets may vary over time. For example:

  • In years when tax rates are 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 an IRA2,3 or employer plan.2 You will pay taxes, but potentially at a lower rate.

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

  • Withdrawals from retirement plans and certain annuities
  • Social Security benefits
  • Pension income
  • Investment income in non-retirement accounts
  • Required minimum distributions (RMDs), earned interest and dividends. (The CARES Act waived RMDs in 2020.)

Withdrawal rates

Historically, a rule of thumb has been that a properly diversified portfolio can last 30 years given withdrawals of 4% or less and annual increases to match the rate of inflation.5

Recent retirees and individuals nearing retirement should consider taking a close look at withdrawal rates with their advisor, if they haven’t already. The choppy markets earlier this year and prolonged low interest rates may have impacted returns in your investment portfolio. Tapping into investments — instead of a cash account — when assets are losing value is not ideal. This is because you need to withdraw a greater percentage of your portfolio to provide the income you want. 

If you are young or mid-career, planning for a 3% to 4% withdrawal rate may be a reasonable approach over the long term. Your advisor knows your situation best and will provide a personalized recommendation based on your goals and needs.

Other retirement account withdrawal options

If you continue to work and are eligible for a health savings account (HSA), your earnings can grow tax-deferred (up to IRS limits). You can pay for qualified medical expenses with tax-free withdrawals from your HSA.

During retirement, consider the tax benefits of qualified charitable distributions (QCDs). You can transfer pre-tax money from a traditional IRA to a charity. A qualified charitable distribution will count toward satisfying your required minimum distribution, although RMDs are waived in 2020 as part of the CARES Act. Neither you nor the charity will pay income taxes on these funds.

Keep in mind that because of the SECURE Act,the QCD you make (when eligible) is reduced by the total deductible IRA contributions you have made since age 70 ½.

Create lasting retirement income

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

 

1 Necessary requirements must be met. Consult with your tax advisor.

2 Withdrawal before the age of 59 ½ may result in a 10% IRS penalty on taxable earnings.

3 Assumes that contributions to the IRA are deductible.

4 The Setting Every Community Up for Retirement Enhancement Act of 2019, better known as the SECURE Act, aims to increase access to workplace retirement plans and generally expand opportunities to save for retirement.

5 From an Ameriprise report for retirees, “Planning for a more confident retirement,” published April 2019. A withdrawal rate below 4% shows a high likelihood that your money will last at least 30 years. As you increase your rate of withdrawal you increase the risk of depleting your assets during your lifetime. To dampen this risk, consider increasing your equity exposure and introducing guarantees into your lifestyle portfolio. It is for illustrative purposes only and does not consider the impact of any investment fees or expenses. It assumes the investment portfolio is rebalanced annually and any dividends are reinvested.