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Optimize withdrawals from your retirement savings

How you take withdrawals from your retirement and other savings can influence your tax payments, Medicare premiums and how long your savings last. The best withdrawal plan for you depends on your income from Social Security, pensions, annuities and other sources, the amount and location of your savings, and how much you want to pass on.

If you want to optimize your withdrawals from a tax and Medicare premium viewpoint, you need to look at how your income and withdrawals are counted by the IRS and Medicare. Let's consider ongoing income first, and then withdrawals from retirement or savings.

Income from Social Security, pensions, annuities and rentals is taxed as earned income. This income is adjusted when calculating taxes. Social Security benefits may not be entirely taxed depending on your total income. For many people, 85 percent of Social Security benefits are taxed. Some annuity income may be excluded from taxation because it is counted as a return of your premium paid. This depends upon whether the annuity is an immediate or deferred annuity. You can find out how your annuity income is taxed from your agent or from your contract. Rental income is taxed at your earned income rate, but may be adjusted based on property expenses. Totaling up all these income streams is the first step to understanding your taxable and Medicare counted income.

The next step is to look at money taken from retirement or other savings. When it comes to taxes and Medicare counted income, there are three categories of savings. Retirement savings are either tax-deferred, such as 401k, 403b, or traditional and rollover IRAs, or tax free such as Roth IRAs and Health Savings Accounts (HSAs). If contributions to these accounts were not taxed when put into the account, they are taxed at your earned income rate when you withdraw the contributions and gains. This is a tax-deferred account. Sometimes contributions were made with money that has already been taxed. Hopefully you have kept track of these additions since they can be withdrawn without paying tax a second time. The rules on how the withdrawals are taxed are complicated, so you may want to consult your tax adviser. You are required to take Required Minimum Distributions (RMDs) from these tax-deferred accounts starting no later than 70 1/2. RMDs will count towards your taxable and Medicare counted income.

The second category is tax-free savings such as Roth IRAs and HSAs. Qualified withdrawals of contributions and gains are not taxed and do not count as Medicare income.

To gain the most benefit, the individual or couple should integrate their withdrawal plan with their Social Security and pension benefits.

Finally, you may have other savings or investment accounts. These include savings accounts, money markets, CDs, mutual funds and any investment held in brokerage accounts. Dividends, capital gains and interest from all these investments are counted for taxes and Medicare. It is counted even if you reinvest earnings back into the investment. These earning are seen on the 1099 forms you receive each year. You may also withdraw money that was part of your principal or from a sale of an investment. If there is a gain, this will also be taxed and counted. The tax rates change depending on the type of gain (qualified dividend, interest, capital or tax-free), and your total income level.

When people retire, the simplistic way to take money from your savings is to start with your non-retirement accounts. The idea is to let the tax-deferred and tax-free accounts grow as long as possible. When your non-retirement accounts are depleted, withdraw from your tax-deferred accounts and the tax-free accounts last. Depending on your income needs, amount of savings and where it is located (taxable, tax-deferred or tax-free), you could pay higher income taxes and Medicare premiums later in retirement. This can be a problem for individuals with larger tax-deferred account (401k, 403b, traditional or rollover IRAs) balances. This is due to RMDs being greater than you need to cover your expenses.

Often doing some advance planning and making withdrawals from accounts with different tax treatments can reduce these problems. You may come out ahead in the long run by taking some withdrawals from tax-deferred accounts instead of taking everything from your non-retirement accounts. You might also consider converting some money in your tax-deferred accounts to a Roth IRA and paying the tax when you are in a lower tax bracket. For many people, this is after they retire but before they are 70. Both strategies may reduce your taxable income and Medicare-counted income later in retirement. Reducing the balance in your tax-deferred accounts results in a lower RMD once you reach 70 1/2. Optimizing your plan means balancing taxes and premiums over your expected retirement. To gain the most benefit, the individual or couple should integrate their withdrawal plan with their Social Security and pension benefits.

Constructing an integrated plan to reduce your overall taxes, minimize your Medicare premiums, and increase your wealth will take some time and effort. The ideal time to do this planning is before you are eligible for Social Security, pension benefits, age 60 and retirement. Once you have a plan in place, implementing it is not difficult and can often be automated. You can also retain financial flexibility and control rather than being boxed into a tax corner.

Putting together an optimized retirement income withdrawal plan can be complex. Because this is your retirement, consider consulting with an experienced financial planner who is a fiduciary to help you create your plan and get it implemented.

Tom Roberts, president and financial planner with A New Approach Financial Planning in Lakewood Ranch, can be reached at 941-927-9590 or by email at