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Tax Tactics To Make Your Retirement Cash Last

Tuesday, October 16, 2012 - 11:27 AM
One of the big challenges in retirement 's taking retirement plan distributions in such a way as to best minimize income tax so more money is left for you. 

A Bankrate article (via Yahoo Finance) discusses three retirement plan distribution scenarios (all retirement money in pre-tax vehicles, a mixture of pre-tax and after-tax vehicles, and pre-tax, after-tax, and untaxed vehicles).  The last one is referred to as the "gold standard" since it offers maximum flexibility for taking retirement plan distributions.

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4
pearlbrownpearlbrown1,356 posts since
Nov 2, 2010
Rep Points: 5,955
1. Wednesday, October 17, 2012 - 8:07 AM
This article says:
In each scenario, a hypothetical couple has $600,000 in assets. To maintain their lifestyle, they need $42,000 of income per year in retirement, $24,000 of which will come from Social Security. They must rely on their retirement funds to provide income of at least $18,000 per year.

Here are the three scenarios, with tips on how to take retirement plan distributions with tax efficiency in mind.
Scenario 1: Pretax vehicles In this scenario, Bankrate's hypothetical couple has invested all $600,000 of their nest egg in a traditional, pretax 401(k) plan and traditional IRA, or they have a traditional pension plan with annuity payments.

Scenario 2: A mix of pretax and after-tax vehicles Our hypothetical couple has $400,000 of their nest egg invested in a traditional, pretax 401(k) plan or traditional IRA and $200,000 in a Roth 401(k) plan or a Roth IRA.

Scenario 3: Pretax, after-tax and untaxed vehicles In this scenario, Bankrate's hypothetical couple has evenly divided their nest egg into three parts: $200,000 is invested in a traditional pretax 401(k) or IRA, $200,000 in a Roth 401(k)/IRA and $200,000 in a regular brokerage account containing stocks.



The article implies that one can merely "divide your net egg" into pretax and after-tax vehicles and still have the same amount invested.  Obviously this is untrue. If one has an effective tax rate of 25% and wants to invest in a Roth, (S)he, will only have 75% of the initial investment versus investing in a Pretax vehicle. This is not an apples to apples comparison.

 
4
StewieStewie56 posts since
Jan 18, 2010
Rep Points: 315
2. Wednesday, October 17, 2012 - 9:53 AM
Stewie, you make a good point.  However, I think the article was looking at the "after everything is said and done" numbers of $200k in each of three vehicles (scenario 3), not "I started out with $266,666 and after an effective tax rate of 25% had only $200k for the Roth."
1
pearlbrownpearlbrown1,356 posts since
Nov 2, 2010
Rep Points: 5,955
3. Wednesday, October 17, 2012 - 12:52 PM
Yes, Pearl, I realize that the article was clearly looking at the  "after everything is said and done" numbers of the three scenarios. However, by making each of the hypothetical couples end up with $600K "after everything is said and done" , and by using such language as "evenly divided their nest egg into three parts", I think that it implied that everything else was equal. 

 Of course it's better to be in the position of hypothetical couple #3 versus that of hypothetical couple #1, but couple #3 would have had to invest much more than couple #1 to get to that "Gold Standard" place.
3
StewieStewie56 posts since
Jan 18, 2010
Rep Points: 315
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