Investment Updates
How Will Your Retirement Distributions Be Taxed?
Published Wednesday, February 11, 2015 at: 7:00 AM EST
Your retirement income likely will come from a variety of sources. For example, there are Social Security as well as brokerage accounts, employer-sponsored retirement plans, traditional and Roth IRAs, and tax-deferred annuities, among other possibilities. With so many choices at your disposal, you’ll need to decide when to tap each of those sources, and taxes will be one key factor in making those decisions.
The conventional wisdom is to withdraw funds from taxable accounts early in retirement in order to preserve tax-sheltered assets for as long as possible, letting the funds continue to grow without being eroded by current taxes. But that’s not a hard and fast rule. You’ll need to come up with a balanced approach which factors in all of your personal circumstances, including your tax situation. Here are tax considerations for several potential income sources:
Brokerage accounts. Because these investment accounts aren’t tax-deferred, how they’re taxed depends on particular assets. Stock dividends and bond interest will be taxed when you receive them. If you sell stocks to raise cash, the sale will be taxed as a short- or long-term capital gain depending on how long you’ve held the shares. If you’ve owned them for more than a year, they’ll be considered long term and taxed at a preferential rate of 15% for most investors and 20% for those in the highest (39.6%) tax bracket for ordinary income. Short-term gains are taxed as ordinary income. In addition, you might be liable for a 3.8% Medicare surtax that applies to the lesser of your “net investment income” (capital gains, dividends, and other investment-related income) and the amount by which your modified adjusted gross income (MAGI) exceeds $200,000 for single filers and $250,000 for joint filers. Capital gains from brokerage accounts could trigger or increase liability for the 3.8% surtax.
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