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It’s no secret that contributing to a 401(k) plan makes sense for most workers. There are upfront tax advantages. Many companies toss in “free” money in the form of matched contributions. And it’s pretty clear that the traditional retirement anchors such as pensions and Social Security aren’t necessarily going to be there the way they were in prior years.

Part of what we’ve been saying is that retirement systems have to have as a backbone guaranteed income for life — income you can not outlive — in the form of a fairly priced annuity.  Many people have a problem with not paying attention to their retirement funds. Maybe they’re talking on their phones, shaving, or eating burgers.  They’re blindly following the car ahead of them.

People really have to plan to be retired for 20, 30 years or longer.  After retirement, you’re likely to find your retirement savings include several different vehicles, which might include 401(k) plans, IRAs, profit sharing plans and taxable investments.  I had the opportunity to read an article by By Tom Behlmer that does a good job of explaining the concerns about withdrawing retirement funds that should be considered.

When withdrawing funds, you need to decide the best order for tapping those accounts. Withdrawing your funds in the most tax-efficient manner can add years to their life, thus increasing your lifetime withdrawals. You may want to consider this strategy:

First, withdraw funds from taxable investments designated for retirement. You don’t pay taxes on your principal, since taxes were already paid on those sums. Capital gains taxes will be due on capital gains, but as long as you’ve held the asset for over a year, the tax rate is 15 percent. When deciding which assets to sell, consider those with lower capital gains. And according to the Tax Prevention and Reconciliation Act, the rate will drop to zero for qualified taxpayers in the 10 percent and 15 percent tax brackets from 2008 to 2010. The same preferential treatment will apply to qualified dividends received thru 2010.

Next, make withdrawals from your tax-deferred investments, including 401(k) plans and traditional IRAs. If some of your traditional IRAs were funded with nondeductible contributions, withdraw those first, since a portion of your withdrawal won’t be taxed. Withdrawals from these accounts are subject to ordinary income tax rates. Keep in mind that that you’ll need to take minimum required distributions by age 701⁄2. The only exception is that those still working can delay distributions from qualified plans (not IRAs) until retirement.

Last, use funds in your Roth IRAs. Since those funds grow tax free, let them continue to grow as long as possible. You may even want to convert your traditional IRA to a Roth IRA. Even though you’ll have to pay income taxes on the taxable portion when you convert the balance, your funds will grow on a tax-free basis. Since you aren’t required to take minimum required distributions from a Roth IRA after age 701⁄2, this option may be more appealing to those who don’t need the funds and are interested in tax-advantaged ways to transfer those assets to heirs.

Of course, your specific situation may dictate a different method of withdrawal. For instance, it may make sense to use your tax-deferred accounts first if your assets have very large capital gains. You may want to bequeath the assets with large capital gains to your heirs so that the assets’ basis will be stepped up to market value after your death.

Or, in years with low income, you might lose some of your itemized deductions or personal exemptions unless you make withdrawals from your tax-deferred accounts to recognize additional income for tax purposes. Individuals in high marginal tax brackets with large tax-deferred balances may find it makes more sense to spread out withdrawals from these accounts to minimize lifetime tax payments.

How you withdraw funds from retirement accounts can add or subtract years from the life of those assets.

Tom Behlmer is a financial advisor living in Nevada City and is a member of the Gold Country Estate Planning Council. He can be reached at gogettom789@gmail.com