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As I was watching the Nightly Business Report last night (14JUL08) I came across a startling revelation. To wit at least one "expert" thinks that 401(k) & IRA accounts should be tapped FIRST after retirement because of expected tax increases.

Are 401(k) and IRA withdrawals taxed differently than dividend income from stocks?


COLLUM: But the Vanguard Group's John Ameriks says many retirees will need to remain more invested in stocks before moving into safer income-producing holdings.

JOHN AMERIKS, INVESTING ANALYST, VANGUARD GROUP: As you get into retirement, that fund allocation is about 50 percent stocks at the point of retirement, and then it drops to about 30 percent stocks once you're about seven to eight years into retirement.

COLLUM: Many retirees are in for a rude awakening when they begin transitioning their portfolios from the accumulation phase of their working years, to the distribution phase of retirement, when they start withdrawing funds from their individual retirement accounts and 401(k) plans. IRA expert Ed Slott says the biggest and most unpleasant surprise is likely to be the tax bite.

ED SLOTT, IRA EXPERT: Remember, none of this money has been taxed. We were all told we had this goody-goody tax break up front, we got a tax deduction but it's kind of like your deal with the devil, in any deal with the devil, there's a day of reckoning and that's the taxes.

COLLUM: For that reason, many financial advisers urge new retirees to avoid tapping tax-deferred accounts as long as possible. But Slott expects the nation's huge national debt to lead to higher taxes in the future. He recommends retirees cash out their IRA portfolios first.

SLOTT: I really believe taxes are going to have to go up. Somebody has got to pay these bills. And if you believe that, it might pay to take some of that taxable money down now while I believe taxes are relatively low

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