How to Pull Cash Out of Your Retirement is just as important as putting money in. Here’s why.
Most small-business owners look forward to the day when they no longer have to work and can retire (or semi-retire) knowing that they have sufficient assets to provide a comfortable retirement. Having sizeable investments is only part of the equation; you also need to ensure that these investments can be converted to cash in a way that minimizes taxes and penalties. Christine Benz, director of personal finance at Morningstar, considers this the logistics of cash withdrawal and provides some great tips on how to best achieve a tax-efficient plan to access your money during retirement.
Your first layer of withdrawals should come from tax-deferred and tax-free accounts like IRAs that have Required Minimum Distributions (RMDs). Tax law requires that after a certain age, you take a minimum amount of money out of these accounts every year. Failure to do so leads to significant penalties. Withdraw just enough to avoid the RMD.
The next layer of cash withdrawal should come from taxable assets with highest cost basis first. Selling these assets and then taking the cash will yield a taxable gain, but because they have a high cost basis, your tax bill will be lower. This layer should be followed with taxable assets that have a lower cost basis and a higher taxable gain.
The final layer returns to your tax-deferred and tax-free accounts (like Roth IRAs). You want to save these for last, since they should be growing in value while enjoying tax benefits.
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A little about Mike Periu
Periu founded Proximo, LLC nearly 15 years ago. The company provides small business education and training services with an emphasis on finance and technology.
Periu teaches empowerment through entrepreneurship and economic opportunity. He regularly appears on television and radio talking about these subjects.
Periu also writes for leading blogs about finance. These include: American Express OpenForum, Yahoo! Finanzas and the Huffington Post.
Periu studied Finance and International Business at Georgetown University. He is a Board member at the Council for Economic Education.
