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Utilizing Current Sources of Income

Part-time income, social security, pension payments, and rental income are important sources of income. It is wise to allocate these funds for covering monthly living expenses since they are often taxable at ordinary income tax rates. Using these funds for day-to-day expenses can help minimize the need for tapping into other investments and potentially incur higher taxes

Interest and Dividends from Investment Portfolios

Interest and dividends are generally taxed as ordinary income. Therefore, it makes sense to use these towards monthly living expenses as well. By doing this, you are not drawing down on the principle of your investments which allows them continued growth.

Required Minimum Distributions (RMDs)

Once you reach the age for RMDs you must withdraw a certain percentage from tax-deferred retirement accounts. These withdrawals are subject to ordinary income tax. Therefore, utilizing these distributions for living expenses is prudent. Anything you do not need for expenses should be reinvested into your taxable account. Or if you are charitably inclined, consider a qualified charitable distribution (QCD). A QCD allows you to transfer your RMD amount to a charity and this amount is excluded from taxable income.

Once you have exhausted the sources above, it is now time to tap into your investable assets. The traditional withdrawal sequence suggests accessing taxable accounts first, followed by tax deferred accounts and finally Roth accounts. Each type of account has different tax ramifications as well as other considerations listed below.

Taxable income vs. tax deferred income vs roth

The traditional withdrawal sequence might not be suitable for everyone as alternative withdrawal solutions may be better. Remember, everyone’s financial situation is unique, and there is no one-size-fits-all approach to retirement planning. Before any decisions are made, it is imperative that you collaborate with your advisor at Fragasso and your tax professional to customize a strategy that aligns with your specific income needs, retirement goals, and tax position. This collaboration can have a meaningful impact on the longevity of assets and a retirement income plan’s success.

Source: https://www.revenue.pa.gov/TaxTypes/InheritanceTax/Pages/default.aspx#:~:text=4.5%20percent%20on%20transfers%20to,on%20transfers%20to%20siblings%3B%20and