Effective withdrawal stratagies

[kbst]

Hi everybody,
Would it be tax efficient to roll 401K money into IRA vehicles that produced dividends that you could harvest as part of your withdrawal amount (ie. 4%). One of us would be 62.

Thanks, kbst

 

[LOL!]

Sure.
Here is a published article by Guyton and Klinger on withdrawal strategy:
http://www.fpanet.org/journal/articles/2006_Issues/jfp0306-art6.cfm
for your further edification.

 

[MasterBlaster]

Kbst:

Per you tax efficiency of the IRA or the 401K. They are taxed the same. You will pay ordinary income taxes on anything taken out of your 401K or your IRA.

You do not get preferred tax rates on IRA dividend distributions.

 

[kbst]

So there's no tax advantage to taking dividends from retirement accounts? If that's the case then the non retirement accounts should be set up to throw off dividends and the retirement accounts should hold the growth portion of the portfolio?

Kbst

 

[Martha]

Interest payers like bonds are good in the retirement account.

I had growth stocks in a 401k plan that had a big loss a few years ago. At the same time our taxable accounts did fine. Couldn't use the loss. Ever. The money is just gone. Then again, I never paid taxes on the money either.

 

[db]

Martha,

Presumably the money you "lost" in stocks when their value dropped isn't just gone, but will return when the value of the stocks go up.  That kind of risk is the risk that money wont be available when you need/want it, a risk common to equities.  The other kind of risk is that your money will lose value because of inflation, a risk common to fixed income securities.  Balancing those two risks is an aim of asset allocation.

Now if you loaded up on trendy stocks near the end of of the last century, you may have lost money from overblown values that are unlikely to return anytime soon, but that wasn't wise investment practice then or now.  A well diversified portfolio with an asset allocation plan you maintain is a better way.

Just buying bonds is a foolish as chasing high-flying stock, IMO.

db

 

[Martha]

Martha,

Presumably the money you "lost" in stocks when their value dropped isn't just gone, but will return when the value of the stocks go up. That kind of risk is the risk that money wont be available when you need/want it, a risk common to equities. The other kind of risk is that your money will lose value because of inflation, a risk common to fixed income securities. Balancing those two risks is an aim of asset allocation.

Now if you loaded up on trendy stocks near the end of of the last century, you may have lost money from overblown values that are unlikely to return anytime soon, but that wasn't wise investment practice then or now. A well diversified portfolio with an asset allocation plan you maintain is a better way.

Just buying bonds is a foolish as chasing high-flying stock, IMO.

db

It looks like I didn't explain myself very well. The question was whether it makes sense to have the growth portion of a portfolio in retirement accounts. There always is a risk of loss, even for stocks that are not trendy. If you have a loss in a stock or a fund, and you decide it is appropriate to sell, you can't take that loss and offset it against income because it is in a retirement plan.

I of course agree that a well balanced portfolio is a good thing. The question is whether there should be preferences in having certain assets in tax defered retirement accounts like 401ks and different assets in taxable accounts. There are tradeoffs in these decisions. But, since interest payers like taxable bonds are always taxed at ordinary income rates, it makes some sense to have that portion of your portfolio in the 401k so you don't have to pay tax on the interest income until you pull it out.