Retirement presents many challenges. Besides figuring out how to use all your newly gained free time, you have a variety of decisions to make. But none may be more important to your long-term financial security than figuring out how and when to withdraw your retirement income.

You see, a well-thought-out tax-smart withdrawal strategy can help you achieve financial freedom for your entire retirement that may last 30 years or longer.

Distributions: Choose a smart way to keep what's yours
Clearly, you want your tax-deferred investments to grow for as long as possible without being taxed because all contributions and any growth in your capital grow tax-free until you are ready to begin withdrawal. That said, it may be wise to consider withdrawing from your taxable accounts (mutual funds and individual securities) first. The tax rate may be more favorable than the ordinary income tax rate you will pay when withdrawing from tax-deferred investments…like your retirement plan. Additionally if you are planning to touch your retirement funds before age 59½, tax-deferred accounts tend to come with lots of rules, regulations and penalties for early withdrawal for your investments.* It may be smarter to hang on to these investments to avoid paying more in penalties and continue to take advantage of all that potential tax deferred growth.
 
Also keep in mind, from the year you reach age 70½, and for every year thereafter, you are required by the Internal Revenue Service to withdraw a portion of the assets in most retirement accounts. This withdrawal is referred to as a “required minimum distribution,” or RMD. You must include and report the RMD amount each year as part of your earned income. When the IRS forces you to begin withdrawing from your accounts at age 70 ½, these required minimum distributions, which are set according to life expectancy tables, can be substantial. If your account balances are big enough, they may bump you into a higher tax bracket. To plan for these distributions, you should aim to be at a lower tax rate than when you were working.

You must take RMDs from the following accounts:

• Traditional and Rollover IRAs   

SEP-IRAs, SIMPLE-IRAs, and SAR-SEPs.          

• Employer plans, including 401(k), 403(b), 457, profit sharing, and money    purchase pension plans. 

The Roth Factor
If possible, you may want to consider delaying withdrawing assets from a Roth IRA, particularly if you hope to pass along these assets along to your heirs. You see, distributions from a Roth IRA are tax-free and have no minimum distribution requirements. In other words, Roth IRA assets can grow income tax-free even beyond the owner’s death.
Traditional IRAs can also be converted to Roth IRAs to help minimize the impact of your RMDs or to help you further your savings if you do not need to withdraw the money. Sure, you'll have to pay taxes upon conversion, but after that, you'll never face IRA-related RMDs again and your money will grow tax-free for your lifetime and that of your beneficiaries. Unlike Traditional IRAs, Roth IRAs do not offer any up-front tax benefits (such as a income-tax deferral or tax-deductions at time of contribution) so you will need to ensure that converting your Traditional IRA fits into your overall tax plan.

Be Tax-Smart about Social Security
Keep in mind that about one-third of people who receive Social Security payments have to pay income taxes on that money. This is an important factor to consider when determining when you want to begin accepting your Social Security benefit. After all, if you delay taking Social Security, you’ll not only receive a higher payment in the future, you may also have to pay less current income taxes. At the end of each year, you will receive a Social Security Benefit Statement (Form SSA-1099) showing the amount of benefits you received. Use this statement when you complete your federal income tax return to find out if you have to pay taxes on your benefits and help to plan accordingly. For more information on how these taxes may affect you and your tax smart retirement plan visit the Social Security website: www.ssa.gov and click on plan your retirement.

Being tax smart means planning smart
Sorting through the tax implications of your future can be enormously complicated and difficult to do alone. Since retirement means major life changes—hopefully for the better if you plan in advance—be sure to seek out a qualified investment professional when it comes to tax decisions and planning your strategy. With the help of a qualified professional, planning a tax- smart retirement can be a snap.