Prioritize Asset Withdrawals
As you require income, Peterson Wealth Advisory will guide you in choosing the order in which to sell assets.
When you start taking federally mandated RMDs from your traditional IRAs and employer-sponsored retirement accounts (with the possible exception of Roth 401(k)s), you’ll want to use these funds for your spending needs before you tap any other accounts. But until then, we will base recommendations on two important considerations:
• Maintain allocation targets and diversification; possibly use the withdrawal as an opportunity to bring allocations back into balance.
• Keep your assets growing at the highest degree possible and at a comfortable risk level.
These goals may appear to be conflicting at times, however, as a rule of thumb rebalancing is generally considered to be more important. Each retiree’s situation is unique, so there are exceptions.
Sell to Keep Your Investment Mix on Target
We may suggest you start withdrawing funds from the portion of your portfolio that has become over concentrated in one type of investment. For example, if the stock market has grown rapidly and your target mix of 60% stocks and 40% bonds has become a lopsided 65% stocks and 35% bonds, we may suggest selling stocks in order to adjust your investment mix, reduce the portfolio’s risk level, and produce income.
Sell to Maximize Asset Growth
The next best thing to not paying taxes is paying as little as possible for as long as possible. Consequently, we may recommend withdrawing your assets in this order:
• Taxable assets.
• Tax-deferred assets in traditional IRAs and employer-sponsored plans.
• Tax-free assets in Roth IRAs.
Here’s the reasoning: In taxable accounts, you’re paying tax each year on the dividends interest, and capital gains that your assets produce. You also may pay taxes on the withdrawals themselves if your assets have appreciated in value. In tax-deferred accounts, you pay tax only when assets are withdrawn, even on gains. In Roth IRAs, you pay no taxes provided certain conditions are met, including holding the account for at least five years and being 59 ½. You can even pass the assets on tax-free to your heirs.
If you’re participating in the new Roth 401(k), you can avoid taking RMDs by rolling your money in the Roth 401(k) over into a Roth IRA. Otherwise, you’ll be required to start making withdrawals from the Roth 401(k) in the year after you reach age 701/2.
Fine-Tune Your Withdrawals
Withdrawals can be fine-tuned further, either to gain as much tax efficiency as possible or to help you meet specific financial goals. Some examples of withdrawal tactics include:
• Sell taxable assets that have lost money.
• Sell taxable assets you’ve held longer than a year.
• Sell tax-deferred assets when conditions are right.
Peterson Wealth Advisory will check your investment mix after you sell assets and will rebalance your portfolio if necessary. However, if your primary goal is to maximize the amount you leave to your heirs, a different approach may be advised. In this case, you may want to continue to hold taxable assets that have risen significantly in value.
What about the equity in your home?
More and more retired homeowners are considering reverse mortgage loans, which let you tap the value of your house without selling it. Here’s how they work: A lender grants you a loan against the equity in your home, which is repaid when your house is sold—usually after your death.
A reverse mortgage loan offers several advantages: You don’t have to repay the loan while you live in your house; you can’t be evicted; and you owe no income tax on the loan. Reverse mortgage lenders, however, charge steep up-front fees—as much as 10% of the loan value or more. The loan must be repaid before the property can passed on to another individual.
