Before
you set up a systematic plan, you should meet with your tax adviser to
discuss how your withdrawals will affect your tax bill.
If you’re withdrawing from a taxable account, you can start any time, and your earnings will be taxed at either the
capital gains
rate
or your ordinary income tax rate, depending on whether you’re selling
or withdrawing earnings, how long you’ve held the investment, and what
type of earnings you have. But
tax-deferred
accounts have stricter rules as to when you can withdraw, whether taxes will be withheld, and whether you have to meet an
MRD.
Furthermore,
when you take systematic withdrawals, the IRS assumes that you take out
earnings before your after-tax principal, and taxes you accordingly.
That’s not the case if you annuitize, when part of each income payment
is considered return of principal and is not taxed.
Getting started
Setting
up or changing a systematic withdrawal is often as easy as filling out
a form or writing a letter specifying the payment amount and schedule.
If
you hold an account directly with a fund company, one of its
representatives can set up the withdrawals at your request. If your
account is with a
brokerage
firm, you can ask your broker to set the process in motion.
Setting
up withdrawals may be more complicated if you have several investment
accounts, some taxable and some
tax deferred
or tax free. With
IRAs
and
taxable accounts you can choose either to have amounts drawn
proportionally from each account or to empty one account at a time.
With certain other tax-deferred plans, you may have to take specific
MRDs from each account.
You might
also use your withdrawals to sell off investments in your taxable
portfolio that have lost money during the year and offset your capital
gains with
capital losses.
Regardless of how you decide to set up your withdrawals, there should be a logic to your plan. Fortunately, you don’t need to make a permanent commitment. One of the most attractive features of systematic withdrawals is that you can always change your mind.
