section 1 - The American College Online Learning Center

(c) Single taxpayer can exceed $60,000 of taxable income and still betaxed at a 15% effective tax ratee. Phase 1 (the individual has both taxable and tax-deferred accounts): Start withwithdrawals from the taxable account and from the tax-deferred account to theextent that withdrawals can be made at a lower than normal tax rate(1) Tax-deferred withdrawals can be part of the withdrawals required to meetexpenses.(a) This has a slight positive impact on how long the portfolio lasts—inpart because early withdrawals also mean loss of some taxdeferred growth.(b) Having the opportunity to mix tax-deferred with taxable distributionsgives the participant more flexibility as they may not want toliquidate the after-tax account for a number of reasons.(2) Tax deferred withdrawals that are converted to a Roth IRA are alsoappropriate to the extent that the converted amounts are taxed at a lowerthan normal rate.(a) Looking to convert now if the current rate is lower than expectedrate on future withdrawals(b) Converting will clearly have a positive impact on the portfolioduration.f. Phase 2 (taxable accounts are depleted): The order of withdrawals betweentax-deferred and tax-exempt ties to the tax rates at the time of the withdrawalversus the tax rates on withdrawals taken later.(1) If the tax rates are higher in the future, take tax-deferred accountwithdrawals to the extent that the effective tax rate is low (e.g., 15% )(2) Withdrawals above and beyond will be taxed at the next marginal rate. Forsome future tax rates will go down as either they will have lower incomeavailable or lower income needs. In this case additional withdrawalsshould come from the Roth account.(3) Many taxpayers at this stage will expect to have the same the marginaltax rate in the future. In this case, the order of withdrawals doesn’t matterfrom a tax perspective (between tax-deferred and tax-exempt accounts).Now you would look to other reasons for maintaining one type of accountover the other.g. Planning checklist(1) Order of withdrawal decisions should become part of annual tax planning.(2) Be sure to have an inventory of the various types of accounts.(3) Identify any required minimum distributions—as there is no discretion inthis case.(4) Review past tax returns to understand the client’s tax situation.(5) Discuss with the client whether there are any income changes or changesin deductions for the current year that offer opportunities in the current year.(6) Look for special issues around selling investments—such as the step up inbasis rules.4.18