A big issue facing many retirees today is which Assets to tap into first. There’s a good chance that you’ve accumulated a variety of retirement investments — 401(k) plan assets, traditional IRAs, Roth IRAs, annuities, and numerous other personal investments. While some of these investments may pay interest or dividends, others will need to be liquidated in order to generate current income. Different investment vehicles can have different tax implications. That’s why it’s important to formulate a withdrawal strategy that best suits your circumstances.

The Big Picture: Balancing Needs With Means
Depending on how much you’ve saved, you should first figure out how much you can afford to draw down your retirement nest egg each year. Financial advisors often recommend liquidating between 3% and 7% each year of your principal at the time of retirement. Of course, your specific payout will depend upon the size of your nest egg, your investment strategy, and other factors unique to your individual circumstances. Also keep in mind that health care costs often escalate later in life and assisted care, if necessary, can be costly.

Special Considerations for Tax-Advantaged Investments
Among the first decisions you may face is when to tap into your tax-deferred assets (traditional IRAs, 401(k) plan assets, and annuities), when to draw down tax-exempt investments (Roth IRAs), and when to liquidate other taxable investments. The advantage of holding on to tax-deferred investments is that they compound on a before-tax basis and therefore have greater earning potential than their taxable counterparts. However, traditional IRAs and employer-sponsored retirement plan assets have minimum distribution rules (see below). The following are some points you’ll need to consider when liquidating or drawing down different types of tax-advantaged investments.

Traditional IRAs, 401(k)s, and other tax-deferred plans require that you begin taking distributions no earlier than age 59 1/2* and no later than age 71 1/2, and that such distributions adhere to minimum distribution rules specified by the IRS. The premise behind minimum payment rules is simple — the longer you are expected to live, the less the IRS requires you to withdraw (and pay taxes on) each year. In 2001, these rules changed. Minimum distributions are now based on a uniform table, which takes into consideration the participant’s and beneficiary’s lifetimes, based on the participant’s age.

Failure to take the required distribution can result in a tax penalty equal to 50% of the required amount. So it pays to make sure that you take the required minimum distribution. For more information on minimum distribution requirements and how they apply to your situation, call the IRS at 1-800-829-3676 or visit www.irs.treas.gov.

Roth IRA distribution rules differ from traditional IRA distribution rules. Contributions to Roth IRAs are made after tax and therefore can be withdrawn at any time. In most cases, earnings from Roth IRAs can only be withdrawn after age 59 1/2 if you wish to avoid a 10% penalty tax.* Unlike traditional IRAs, Roth IRAs do not require you to begin taking distributions by age 70 1/2, and minimum distribution rules do not apply. In fact, you’re never required to take distributions from your own Roth IRA. However, your beneficiaries will be required to take distributions after your death.

Annuities also restrict distributions until after age 59 1/2, and early withdrawals are usually subject to a surrender charge to the issuing company in addition to a 10% IRS early withdrawal penalty on earnings. Although annuities are not subject to IRS-mandated minimum distribution rules, they may be subject to a wide variety of distribution requirements and options, depending on the particular annuity contract.

*Certain exceptions may apply.