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Financial Tip for Retirees

posted Feb 25, 2015, 8:04 AM by Tim Isbell   [ updated Feb 25, 2015, 8:27 AM ]
I've known about this concept for years but never got around to implementing it, until now. So I'm passing the tip along to readers. It is a tax-smart strategy for generating a stream of money from your taxable account. While this is useful for anyone, it is especially useful for retirees who need to supplement Social Security beyond what they can do using tax-free retirement accounts.

During the accumulation years, most of us routinely reinvest all dividends and capital gain distributions back into the investment that generated them. This is smart and results in a fast growing portfolio. In taxable accounts, this results in annual taxes as triggered by the 1099's we receive each January. So far, so good.

Then in retirement many of us hit a point where we need to extract a stream money from our taxable account. So we periodically sell shares - while continuing to reinvest distributions! This means we now we have 2 taxable things going on, the taxation on the reinvested distributions AND the capital gains taxation due to the shares we sell to generate living money!

There is a better way: stop reinvesting distributions and start diverting this stream of money into a money market fund or your checking account - and use it. You pay taxes on this distribution stream every year, whether you reinvest it or use spend it. So spend from the stream of distributions before selling shares. 

I've added this concept to both Mutual Fund Distributions and Taxation (a refresher on what all those 1099's mean), and also to Retirement Funding (some advice on how to fund your retirement). Indeed, I've just revised both pages enough that even if you saw them a year ago when I posted them, they're worth another look.


All the best, Tim

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