retirement

Wise withdrawal strategies

Avoid penalties/minimize taxes

When converting your savings into income, you'll also need to consider both tax implications and distribution requirements.

Bob Mecca, financial planner with Robert A. Mecca in Hoffman Estates, Illinois, says it's generally wise to tap taxable accounts first as a source of income. By using money from taxable mutual funds, individual stocks and other investments, you allow tax-favored assets to enjoy compounded growth as long as possible.

Another benefit of tapping non-retirement investment accounts first is that earnings on these accounts are generally taxed at the lower capital gains rate, rather than the ordinary income tax you'll owe when you take distributions from your 401(k) and IRA.

Once you've spent down your taxable sources of income (including personal savings), says Mecca, move on to tax-deferred accounts, including traditional IRAs and 401(k)s.

Just be sure you're at least 59 1/2 before you take money from a tax-deferred account. Under most circumstances, you can't begin tapping your traditional IRA or 401(k) until that age without incurring a 10 percent early withdrawal penalty, although exceptions to this rule do exist.

Also remember that you must begin to take distributions from your traditional IRA by age 70 1/2 to avoid paying a 50 percent excise tax on the amount not distributed. To learn more about creating a wise withdrawal strategy, see the Bankrate article "Know your required minimum distribution."

Roth IRAs, says Mecca, should be left for last.

Since there are no minimum withdrawal rules for a Roth, your earnings will continue to grow tax-free. A Roth IRA also provides valuable estate planning benefits, since your heirs will not owe taxes on an inherited Roth -- and better yet, they will be able to spread out their withdrawals over their lifetimes if they don't need the money, allowing the account to continue growing tax-free.

When determining a wise withdrawal strategy, consider not just your age and the size of your nest egg, but how to make the most of your money by minimizing your tax bite.

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