(Getty Images/ThinkStock )
How to Lessen the Tax Bite in Retirement
SEPTEMBER 09, 2013Sandra Block , KiplingerYou may have $1 million in retirement savings, but the amount available for your retirement income is much less because a portion of the money will go to pay federal and state taxes. This is where having different types of retirement accounts---taxable, tax-deferred and tax-free---comes into play. Depending on the account you tap, along with the type of investment, your federal tax rate could range from 0% to 39.6%. You can keep your tax rate on the low end of the scale by taking tax-efficient withdrawals from your accounts.
What to tap first. Conventional wisdom has long held that retirees should take withdrawals from their taxable accounts first. That way, you can benefit from low capital gains rates while investments in your tax-deferred and tax-free retirement accounts continue to grow, unfettered by taxes.
In a taxable account, the capital gains rate on assets you've owned more than a year ranges from 0% for taxpayers in the 10% and 15% tax brackets to a maximum rate of 23.8% for taxpayers in the top tax bracket. To minimize taxes, use your taxable accounts for investments that qualify for long-term capital gains rates or are tax-free. The list typically includes growth stocks, tax-efficient mutual funds and exchange-traded funds, says Christine Fahlund, senior financial planner for T. Rowe Price.Read more: Yahoo Finance