Managing Tax-Deferred, Tax-Free, and Taxable Assets for Income

There are generally three types of accounts that an investor may build up during the accumulation period before retirement:

Tax-Deferred: Traditional IRA's, SEP IRA's, SIMPLE IRA's, 401k's (at least the employer portion), variable annuities (the gains are tax-deferred)

Tax-Free: Roth IRA's and Roth 401k (employee portion only)

Taxable: Individual and joint investment accounts with no special tax status

So how do you manage the withdrawals from these various types of accounts? First of all, you are very possibly required to take a certain amount from your tax-deferred investments due to the required minimum distribution rules. That typically amounts to a distribution of 5-7% depending on your age.

Second of all, you want to use your tax bracket to guide your distribution approach. As long as you are in the bottom bracket, you should continue to draw from your tax-deferred investments only. Next, you should draw from your taxable investments with losses or long-term capital gains. Last, you should draw from your Roth assets. Roth investments are the best tool you have; you should save them for special needs. If they do not get used, they are a great means for passing wealth to the next generation.

What about taxable investments that are currently showing a loss -- is it o.k. to sell them? Of course! These sales will generate losses that may help reduce your tax bill.  However, you may want to adjust your allocation in other accounts so that you still have the opportunity to recover from the loss when the asset bounces back. That is, buy a similar asset in one of your IRA's and when it recovers, you will recoup your losses. You will have to beware of a wash sale, which can still be triggered when you sell something in a taxable account and buy the same thing in an IRA.

Managing your tax rate in retirement can dramatically impact your total income. Take the time to figure out the income level at which your tax bracket jumps and plan accordingly.