But once you're retired and able to tap your 401(k) or individual
retirement account (IRA), it's not easy to titrate your own doses of
cash. Withdraw too much, and you use up your nest egg too quickly;
too little, and you might unnecessarily crimp your retirement
Overlaying the how-much-is-enough question are several finer points
of tax planning. Because you can decide how much money to pull out
of a 401(k) or individual retirement account, and because those
withdrawals are added to your taxable income, there are strategies
that can help or hurt your bottom line.
That's especially true for early retirees trying to decide when to
start Social Security, how to pay for health care and more. Here are
some money-saving withdrawal tips.
CURB TAXABLE INCOME
If you are buying your own health insurance via the Obamacare
exchanges, keep your taxable income low to qualify for big
subsidies, advises Neil Krishnaswamy, financial planner with
Exencial Wealth Advisors in Plano, Texas.
"It's a pretty substantial savings on premiums," said Krishnaswamy.
Here's an example using national averages from the calculator on the
Kaiser Family Foundation web page (http://kff.org/interactive/subsidy-calculator/).
Two 62-year-old spouses with annual taxable income of $62,000 would
receive a subsidy of $8,677 a year, against a national average
premium of $14,567. If they took another $1,000 out of their
tax-deferred account and raised their taxable income to $63,000,
they would be disqualified from receiving a subsidy.
Not every case may be that dramatic, but it's worth checking the
income limits and available subsidies in your own state.
If you retired early, consider taking out extra money to live on and
delaying Social Security benefits until you are older. Withdrawing
money from retirement savings hurts. You not only lose the savings,
you lose future earnings on those savings. And in most cases, you
have to pay income taxes on withdrawals from those tax-deferred
But Social Security benefits go up roughly 8 percent a year for
every year you don't claim them. And even after you claim them, they
rise with the cost of living and are guaranteed for life. When you
draw down your own savings to protect a bigger Social Security
payment, tell yourself you are buying the cheapest and best annuity
you can get.
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PLAN IN ADVANCE
Plan ahead for mandatory withdrawals. In the year you turn 70 1/2,
you have to begin drawing down your tax-deferred IRAs and 401(k)
accounts and paying income taxes on those withdrawals. Unless you
expect to be in the lowest tax bracket at the time, it makes sense
to start withdrawing at least enough every year before then to "use
up" the lower tax brackets.
For single people in 2014, you're in a 10 or 15 percent marginal tax
bracket until you make more than $36,000 a year. For married people
filing jointly, that 15 percent bracket goes up to $73,800. It's a
lot better to pull out that money in your 60s and use up other
savings to live on, than it is to save it all until you are 70 and
then withdraw large chunks at higher interest rates.
GET A GOOD ACCOUNTANT
You may want to use early years of retirement to take the tax hit
required to move money from a traditional IRA into a Roth IRA that
will free you of future taxes on that money and its earnings.
You may pull a lot of money out of your account in one year and
spend it over two or three years, to keep yourself qualified for
subsidies in most years.
You may titrate your withdrawals to keep your Medicare premiums
(also income linked) as low as possible.
The best way to optimize it all? Get an adviser or accountant who is
comfortable with a spreadsheet and can pull all of these different
(Editing by Bernadette Baum)
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