Retirement Income Toolbox

April 26, 2016

After reading several articles recently I thought it was important to help those getting ready to put their retirement income plan in place some guidance on where to draw from first.   There are essentially two scenarios you need to consider prior to choosing how you will draw on your nest egg.  I will present an overview of each scenario in this post.

The first case is if you wish to favor your heirs as far as passing down to them what is left of your nest egg with the least amount of taxes to go along with the gift. 

“To favor your heirs, withdraw from your annuity and IRAs first.” says Eric Reinhold in his article posted on the Christian Broadcasting Network Site (* In this article he uses an example of the client wishing to minimize the tax implications of the gift to their heirs upon the client’s death.  Avoiding generating current retirement income from the sale of assets that will receive a “step-up in basis” at your death.  As an example if you purchased XYZ stock at $6 a share (Your basis) and on the date of your death it is priced at $60 per share, your heirs would enjoy receiving this new price of $60 per share as their new cost basis and won’t pay taxes on anything up to that point when they sell.  In the future if the stock was worth over $60 they would simply pay the capital gains tax on the portion above the $60 price.

What happens if you spend your other assets first and leave large annuities or IRAs to your heirs?  IRAs have no step-up in basis at your death and are taxed as ordinary income, not the lower capital gains tax rates.  Annuities will be taxed on the amount above what was originally invested upon the withdrawals.  This would mean an heir in the highest tax bracket would pay 35% taxes on YOUR previously untaxed gains (or possibly more depending on the state or residence).  This certainly can cause a reasonably sized inheritance to be reduced substantially. 

If you ended up in this situation due to a mistake or lack of planning, your heirs can help reduce these tax hits to their inheritance by using a “Stretch IRA” in some cases.  Instead of receiving the IRA assets in a lump sum or over a 5- year period and paying the taxes as the money comes in, this allows the beneficiary to stretch out the proceeds over his or her lifetime.  This can certainly help reduce the tax hit for the beneficiary (Please see your financial advisor for more information on this type of program).

Let’s now discuss someone who doesn’t have any heirs or doesn’t particularly want to leave a huge inheritance for their heirs. To Maximize YOUR lifetime income you would withdraw from your taxable investments and Roth IRAs first (Just the opposite of the first scenarios).  When you aren’t trying to maximize and inheritance this will prolong the tax-deferred growth of your annuity and/or IRA.  You can put off taking distributions from your IRA up to age 70 ½, and in the case of a nonqualified annuity, you may be able to defer the gains for the rest of your life. The amount of your annuity payments if you later decide to take them will increase as time goes by.

So you can see from these examples you can maximize the use of your retirement income savings by matching them to your goal during retirement which varies according to how important leaving a significant amount for your heirs is to you.

Part of this material was prepared by Eric Reinhold.

This information is not intended to be a substitute for specific individualized tax or legal advice.  We suggest that you discuss your special situation with a qualified tax or legal advisor.

*  1. Eric Reinhold – Sound Mind Investing
     2. “Which Retirement Assets Should Your Withdraw First?
     4. The Christian Broadcasting Network