Use High Income Investments in Your
IRAs for Retirement Income
©
Shane Flait (2011)
The tax-deferred and tax-free nature
of IRAs makes high income
investments attractive for retirees
especially if they’re looking for
income to live on. Here’s why.
Income-based investments like bonds,
bond funds, CDs, or income
generating equities like preferred
stocks offer yearly income you can
count on. They are often a safe
investment too depending on their
ratings. But tax treatment of
income-based investments often
undermines there attractiveness
because those earning are taxed
yearly. Fortunately that’s where IRA
accounts holding such investments
can help out.
Traditional IRAs defer taxation on
earnings of investments within their
accounts until you withdraw money
from those accounts. At which time,
you pay income tax rates on whatever
you withdraw. Roth IRAs forego all
taxation of earnings while held and
even when withdrawn.
So holding income-based investments
within IRA accounts allows their
earnings to compound undiminished by
yearly taxation.
This favorable tax treatment of IRAs
allows their account values to
increase more reliably on a yearly
basis than perhaps equity growth
stocks. And year in and year out
investment growth is what is so
powerful under the principles of
compounding and time.
Retirees who need to withdraw from
their savings to supplement their
retirement income from Social
Security benefits and pensions
certainly should have income-based
investments that are reliably
generating that income – and more.
Ideally, they should have enough
income-based investments to allow
them to live off just their total
annual earnings – or less. Lastly,
those investments should be held in
both their IRA accounts and normal
taxable accounts.
Need to live off income from savings
– before age 70½
If you’re under 70½ years old,
you’re not obligated to withdraw any
money from your traditional IRA
accounts. So, don’t withdraw income
from them but let those investment
earnings continue to earn and
compound. That way they won’t
contribute to any current taxable
income.
Take your needed savings income from
income-based investments in your
taxable accounts since their
earnings will generate taxes anyway.
But, if you must take some from your
IRAs take what you need only after
you take as much as you can from
your taxable accounts to minimize
your annual loss to taxation.
Need to live off income from savings
– after age 70½
After reaching 70½, you must
annually make a minimum required
distribution (MRD) from your
traditional IRAs. Try to take just
this yearly minimum so you let the
remaining earned income in those
account continue to compound.
Roth IRAs never require you to make
any MRDs. But still minimize
withdrawing money from them since
their tax free growth of their
earnings makes them an advantage
over your taxable accounts.
Allow your taxable accounts to
deplete first. But leave a residual
amount in them for, say, 6 months
emergency cash.
The balance of your taxable
investments
Any excess investments in your
taxable accounts that aren’t needed
for your yearly income needs should
be oriented to equity growth
investments. That’s because you’ve
satisfied your ‘income needs’ from
your RMDs and the taxable earnings
of your high income taxable
investments. Gear the remaining
portion of your taxable investments
to long term growth investments that
trigger no or low taxation per year.
Be sure to buy reliable equity
growth stocks to help increase the
value of your taxable account over
and above inflation. Since you’re
not counting on them for current
income, you can afford more risk of
loss for the higher growth rates
that some long term equity
investments can offer. And when you
do cash them in for later use,
you’ll pay only the lower long term
capital gains tax rates.
