A New Horizon. Once you've reached retirement, it's time for all your hard work to start paying off. But to help your nest egg last as long as you do, it's important to stay proactive. Consider when you want to begin taking distributions, how much you should take each year, and how taxes may affect your assets.
In other words, your investing journey isn't over. It has shifted into a new phase.
Timing Is Everything
How you'll be taxed on retirement income depends largely on when you decide to retire. If you take income too early or too late, you may trigger additional tax consequences. If your employer-sponsored retirement plan is your largest source of retirement income, it may be a good idea to step back, take a breath, and consider the big picture before you decide the timing and amount of your distributions.
Watch for Speed Traps
- Distributions are taxed as ordinary income
- 20% mandatory withholding for federal taxes
- 10% additional tax for distributions before age 59½ (or age 55 if separation from service occurs after age 55)
- Loss of tax-deferred growth potential of your assets
- Less money accumulated for retirement
How you choose to take your distributions can also determine how much you may have to pay in federal income tax. Choosing a lump sum can have a negative tax impact, and taking too much in systematic withdrawals may deplete your account too quickly. Whether you're planning a long retirement or you decide to delay your retirement, it's important to consider how the withdrawal rate you choose can affect your retirement income in the long run. The chart below illustrates what a difference 1% can make in how long your money may last.
Don't Forget Taxes
In retirement, just because your paycheck stops doesn't mean taxes do. As you start your distribution phase, it's important to consider how your distributions will be taxed.
For more information on how taxes can affect your income, even in retirement, we've got a handy guide to Tax Deferral and Taxes & Inflation. And remember, market volatility is always an important consideration when deciding when to retire and how to handle income distributions. Our investor's guides to Asset Allocation and Portfolio Rebalancing can help keep you on track.
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