June 29, 2007 — -- Sooner or later, you'll need the money you've been saving and investing. Sometimes, you'll spend it on happy things: college, a trip, a remote-control lawn mower. Other times, you'll spend savings on more mundane items: retirement, long-term care.
By the time you need to spend your savings, though, you'll probably have several sources to tap: IRAs, for example. Taxable brokerage accounts. Your home equity.
The question: How to make your assets last as long as possible? It's a particularly urgent question if you're drawing down your elderly parents' money to help pay for their care. The order in which you tap the accounts can make a world of difference.
The general advice for taking withdrawals is to tap taxable accounts first, notes Stuart Ritter, a financial planner at T. Rowe Price. Long-term gains — profits from assets you sell after you've held them more than a year — are taxed at 15%, lower than the rate most people pay on ordinary income. As taxes go, the 15% tax on long-term gains isn't terribly onerous.The one exception to this rule: If you're required to take a withdrawal from a traditional IRA or a 401(k), take that money before drawing on any other account. Most tax-deferred retirement plans require you to start taking withdrawals at age 70½. If you don't take the minimum withdrawal, which is based on your life expectancy, the IRS will hit you with tax penalties.
Once you've exhausted your taxable assets, start to draw down tax-deferred retirement accounts, such as traditional IRAs or corporate 401(k) plans. You'll owe taxes on your withdrawals at your current income tax rate. Typically, though, your tax rate is lower in retirement than when you're working full time.
If you're managing the money of a parent in a nursing home, bear in mind that your parent will be able to deduct some of those expenses from federal income tax. Suppose, for example, that your father is in a certified long-term care facility and that you paid for his care by withdrawing $30,000 from his IRA.