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Subject:  Re: Establishing a Ladder Date:  10/21/2001  12:16 PM
Author:  intercst Number:  7412 of 20793

mawhinney asks,

<<<<Once a bond/CD ladder is established and withdrawals have begun, how should a retiree go about funding the ladder each year? Where do the funds for each new bond/CD come from?

From your stock portfolio.>>>>>

When you fund your retirement ladder each year do you use dividends and distributions from taxable accounts instead of reinvesting them? If so, wouldn't this manuever possible save paying extra taxes for if you reinvested and then had to sell to fund the ladder, you could possibly be paying extra capital gains tax. Seems as though it might be best to have all dividends and distributions paid out and if they are not needed to fund a new ladder, they could be reinvested in the same instruments or to establish new accounts.

Yes. As a retiree you should always spend interest and dividend income to meet your expenses before liquidating any stock. However, someone owning an S&P500 index fund is only getting about a 1% dividend, so they'll still need to sell stock if they are spending 4% of their retirement portfolio.

Do you use funds in taxable accounts first or do you use tax deferred accounts first? It is seems as though there are pros and cons to each method. Leaving tax deferred accounts to grow as long as possible and using the funds in taxble accounts first seems wise. However, if one wants to leave funds to hiers or needs to leave funds to provide care for a disable person, it seems that it would be best to use up funds in tax deferred accounts first so that the person or persons inheriting the funds would recieve the benefit of inheriting the funds in taxable accounts at the cost basis on the date of death. Your thoughts, please!

My preference is to spend my IRA/401k first for the reasons you list. Since I retired in 1994 at age 38 another concern was letting my IRA grow to a very large value when I'm required to make distributions at age 70.5. Under current tax law, my IRA distributions could be taxed as high as 39.6%, while stock held in my long term buy and hold taxable account sees a maximum capital gains tax of 20% no matter how large the account gets. I decided to tap my IRA using the 72(t) exception while I'm in a lower tax bracket, hopefully limiting the tax burden when I'm 70.5.

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