Should you arrange automatic distributions from your retirement or investment accounts?

Provided by Tiffany Valentine, CFP®
Vice President and Director of Financial Planning

Some retirees wish they could simplify money management. Estimating investment income, annual retirement plan distributions, and quarterly taxes can be a chore.

This is why some retirees choose to make systematic withdrawals. Just as they contributed a set amount per month to their retirement accounts while working, they now withdraw a set amount from their accounts each month, quarter, or year. 

The simplicity of this may appeal to you. The potential drawback is that a systematic withdrawal strategy can risk oversimplifying the complex matter of retirement income distribution.

How do these strategies work? A specific monthly, quarterly, or annual withdrawal amount is established, and then assets are sold or liquidated to generate the cash. As people commonly have multiple retirement or investment accounts, a comprehensive systematic withdrawal strategy arranges proportionate withdrawals from most or all of them. Sometimes, federal or state taxes can be withheld from the withdrawals.1

Remember, investments will fluctuate in value and when sold, they may be worth more or less that their original cost.  This article is not intended as tax or legal advice, and may not be used for the purpose of avoiding any state or federal tax penalties. Please consult a professional with legal or tax experience regarding your situation.

These withdrawals often take time to arrange. Most investment custodians will permit them, but paperwork is necessary. In some cases, they are only allowed when the account balance is above a certain level.2

In the big picture, tax issues must also be considered. Withdrawals from retirement accounts may be characterized as taxable income.2

There are times when systematic withdrawal strategies may not work well. For example, say some of your investments have lost value, but your withdrawal amount stays the same. This means that a greater percentage of your investments may have to be sold to generate that income you have set up.

So during this period, you are selling a greater percentage of your invested assets  – assets that have the potential to grow in the future.1

Also, note that required minimum distributions (RMDs) may apply to certain accounts after you reach age 70½. That implies an end to systematic withdrawals, as your RMDs will almost certainly vary per year.2

There are pros and cons to adopting a systematic withdrawal strategy. A financial or tax professional may help you make an informed decision.

Tiffany Valentine, CFP® is a Registered Representative with and securities and financial planning offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC. CA Insurance License # 0D73175

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.

Several factors will affect the cost and availability of life insurance, including age, health, and the type and amount of insurance purchased. Life insurance policies have expenses, including mortality and other charges. If a policy is surrendered prematurely, the policyholder also may pay surrender charges and have income tax implications. You should consider determining whether you are insurable before implementing a strategy involving life insurance. Any guarantees associated with a policy are dependent on the ability of the issuing insurance company to continue making claim payments.

Citations.
1 – thebalance.com/what-is-a-systematic-withdrawal-plan-2388788 [6/29/18]
2 – investopedia.com/terms/s/systematicwithdrawalplan.asp [4/19/19]