Key to retirement is maximizing savings and navigating post-work life with a sound financial plan. As part of that, it is important to time withdrawals from various retirement accounts just right, using methods that can benefit the retiree more than the IRS. So, here are five tax-efficient withdrawal strategies during retirement.
It is first necessary to define a few key account terms and what they mean for the owner and the Internal Revenue Service. They are:
Here are common retirement accounts and what they mean regarding taxes. Note that many individuals have multiple account types, as diversification is important in terms of cash flow, tax implications, and risk. In fact, it is in the same category as estate and legacy planning.
To optimize withdrawals in retirement, the retiree needs a solid understanding of tax scenarios, financial objectives, and how accounts are structured. With that in mind, these are fundamental tax-efficient withdrawal strategies:
Here are two more advanced ways to reduce one’s tax bill during retirement:
Tax planning is of utmost importance to individuals in this category since more options mean more decisions. Overall, tax-efficient investments and charitable donations are prime tax strategies for this demographic, as are Roth conversions during lower-income years.
While a retirement withdrawal strategy varies for each individual, it should start with establishing how all their assets are structured and the point at which payouts start.
After all, for those who retired from corporate life, there could be pension or stock options, or deferred compensation. A retiree who recently sold their business may be getting payments, as part of the transaction, over several years. Then there is the person who bought an annuity decades ago and could soon be looking to activate that income stream.
Thus, rather than assume withdrawals must be made the first day of retirement, some experts suggest constructing a five-year cash flow plan, which might include predictions about any consulting or part-time income the new retiree may earn early on. Then, a withdrawal plan can be put in place, striking a balance between taxable and tax-deferred account withdrawals.
Underscoring the need for a financial planner or other tax professional, retirees may need to adjust their strategies based on changes to tax laws, which professionals keep track of, and to life changes.
Some retirement planners say a more flexible withdrawal approach permits the retiree to withdraw funds based on their needs, with the proviso that they remain within certain guardrails – maintaining a certain dollar amount, for instance. For example, retirees could begin withdrawing at a higher rate and adjust that downward when necessary.
Ultimately, retirement is all about change, and there may be a need to adapt to personal life changes. Such changes could necessitate retirement withdrawal pivots.
Change can also mean revising the makeup of one’s investment holdings. A more modern portfolio is not merely limited to stocks and bonds but includes other assets that diversifies it. Diversification is key to successful long-term investing.
Alternative investments can be a good way to help accomplish this. Traditional portfolio asset allocation envisages a 60% public stock and 40% fixed income allocation. However, a more balanced 60/20/20 or 50/30/20 split, incorporating alternative assets, may make a portfolio less sensitive to public market short-term swings.
Real estate, private equity, venture capital, digital assets, precious metals and collectibles are among the asset classes deemed “alternative investments.” Broadly speaking, such investments tend to be less connected to public equity, and thus offer potential for diversification. Of course, like traditional investments, it is important to remember that alternatives also entail a degree of risk.
In some cases, this risk can be greater than that of traditional investments. This is why these asset classes were traditionally accessible only to an exclusive base of wealthy individuals and institutional investors buying in at very high minimums — often between $500,000 and $1 million. These people were considered to be more capable of weathering losses of that magnitude, should the investments underperform.
However, Yieldstreet has opened a number of carefully curated alternative investment strategies to all investors. While the risk is still there, the company offers help in capitalizing on areas such as real estate, legal finance, art finance and structured notes — as well as a wide range of other unique alternative investments.
Of all the seasons of life, retirement is a time during which most people want to hold onto – if not generate — as much money as possible, rather than send it to Uncle Sam. Employing these tax-efficient withdrawal strategies can help. And do keep in mind the importance of a diversified investment portfolio and how to put one together. That also can help make for a better retirement.
Yieldstreet provides access to alternative investments previously reserved only for institutions and the ultra-wealthy. Our mission is to help millions of people generate $3 billion of income outside the traditional public markets by 2025. We are committed to making financial products more inclusive by creating a modern investment portfolio.