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Making withdrawals from retirement accounts

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June 19th, 2012

Growing a substantial nest egg is only half the battle. Once you reach retirement, then you need to figure out how to make withdrawals from your various investment accounts in a savvy way that enables you to have the money you need for your lifestyle. While there is no generic formula for success because each individual s goals, income, and tax situations vary, there are some rules of thumb you and your financial advisor should consider. We tapped experts from around the country to share with us their dos and don ts when it comes to making withdrawals from retirement accounts. DON T make withdrawals before age 59 ' . Erin Botsford (botsfordfinancial.com), a Texas financial planner and author of The Big Retirement Risk: Running Out of Money Before You Run Out of Time, says the IRS will stick you with a 10% penalty if you take money out of retirement accounts too soon. DO withdraw money during years when your income is down. It is most advantageous from a tax perspective to withdraw money in years when you have relatively low income from other sources to help keep your ordinary income tax rates in the lowest bracket possible, Botsford says. DON T follow the 4% rule. Old wisdom dictated that retirees should withdraw a flat 4% from retirement accounts each year. Connecticut financial planner Sean Dowling (thedowlinggroup.com) advises using a more sophisticated formula that includes a fixed amount and a percentage of the account balance to avoid depleting funds. DO maintain an after-tax cushion. If your money is locked up in tax-deferred accounts like 401(k)s or IRAs, you could face penalties in an emergency. Michigan financial consultant Dave Boike (theretirementresource.org) helps clients avoid that scenario. I like to keep after-tax money more accessible because if they need $30,000 for a new roof, I don t want them to have to disrupt an IRA, he says. DO invest in income-producing assets. Even if you don t have a pension, Boike says you can create pension-like income by shifting money to guaranteed products like annuities that will pay out a specified amount each month. DON T withdraw from IRAs until age 70 ' . Boike says that is the age when retirees are required to begin taking minimum distributions for traditional IRAs. Depending on individual circumstances, he says people in their 60s might want to convert traditional IRAs to Roth IRAs, which can grow tax-deferred indefinitely. DON T keep your 401(k). New York asset manager Elle Kaplan (lexioncapital.com) says to roll over employer-sponsored 401(k) plans after retirement. You ll have a greater choice of investment options if you convert your 401(k) to an IRA or other tax-deferred account. DO introduce your advisors. Kaplan says it s critical that your accountant and financial advisor work together, especially during retirement. Your accountant should keep your investment manager abreast of any changes to your income so you can avoid negative taxable events. If your professional advisors are not communicating with one another, you are not getting the most value, Kaplan says. meghan.streit@erickson.com

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