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By Jason Stipp and Christine Benz | 02-25-2013 01:00 PM

5 Tax-Planning Tips for Retirees

Morningstar's Christine Benz offers hints for how retirees should approach taxes in regard to portfolio withdrawals, RMD reinvestments, property, health care, and estate planning.

Jason Stipp: I am Jason Stipp for Morningstar. Retirement is supposed to be a time that you can step away from a lot of the day-to-day hassles of life, but unfortunately tax planning is not one of those things. Here to offer some top tips for retirees on the tax front is Morningstar's Christine Benz, our director of personal finance. Thanks for joining me, Christine.

Christine Benz: Jason, great to be here.

Stipp: There are a few more complications that come into play when you go into that drawdown mode or retirement mode on the tax front. The first one is about withdrawals, so you will be taking money out of your portfolio. There can be some big tax implications here. What should investors keep in mind?

Benz: Well, I think that one of the key concepts to keep in mind is that there are some sensible sequences of withdrawals that will tend to make sense for retirees with a lot of different profiles. So, definitely you want to make sure you're taking your required minimum distributions from your traditional IRAs or 401(k)s.

Then probably in most cases move to the taxable accounts for the next set of distributions. Then [tap assets from] traditional IRAs and 401(k)s. And save those Roth assets--to the extent that you have any in your retirement plan--to the very last. The key idea across all of these different categories is that you want to save the accounts that have the most tax advantages until the last, while getting rid of those with the least tax advantages--or the heaviest tax costs from year to year--getting rid of those first.

Stipp: And even that first bucket Christine--those RMDs that if you're over age 70 1/2, you do need to take those, otherwise you face penalties--you say you don't have to always take them though from the same account. You could have some flexibility there?

Benz: You absolutely do. I think sometimes people think, well, I need to take proportionate shares out of every holding in this account. You can actually be quite strategic about where you go for the RMDs. So, for example, if you have a holding or two and they're at a low ebb--maybe the market is down and you think they'll recover--you can leave those alone and instead pull money from something that you think is maybe overpriced or something that's more liquid. So, you can definitely be strategic, and you should think about that when RMD season rolls around. As long as you're pulling money from the right account type, you can be fairly discretionary in terms of where you go for that cash.

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