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6. Decide which investments to use first.
As a rule of thumb, if you have a choice of investment assets
to use for income sources, you might want to draw from your
taxable accounts first. Drawing principal from CDs, savings
accounts, or other cash assets will generally not create a taxable
event. Also, investment gains in taxable accounts that have
been invested for more than a year will be taxed at the long-
term capital gains rate of 15% or 20%.
If you were to take that same income from a tax-deferred or
tax-qualified account, you will pay ordinary income tax on that
amount, at your current tax rate. Therefore, you might want to
delay dipping into your IRA and 401(k) balances for as long as
you can. The idea is that the money you pay in taxes, which may
have been put off by using other assets, reduces the amount
you have invested. You could miss out on the income and gains
that may have been earned on that money over time.
Chapter 6: Your Action Plan
