Smith & Gesteland Quick Tip

Supplement Social Security With Already Taxed Funds First

Most individuals will live out their retirement years on a combination of Social Security, investments, and retirement savings. Many retirees get their savings by rolling a company-sponsored retirement plan into an IRA - a move that gives retirees more control over their funds, while preserving their tax-advantaged status. (To avoid a 20 percent income tax withholding, the rollover must be completed on a trustee-to-trustee basis.)
When it comes to supplementing monthly Social Security checks, CPAs typically suggest that retirees first draw down accounts such as savings and brokerage accounts that were funded with after-tax dollars. With capital gains generating a maximum tax rate of 15 percent, the taxes on liquidation of these assets are almost certain to be less than what you would pay on funds withdrawn from non-tax-deferred retirement accounts (with the exception of the Roth IRA). As you draw down your taxable assets, money invested in tax-deferred accounts continues to compound without taxation.