The top 5 ways for retirees to take income from their investments

FROM MARKETWATCH.COM

Once you retire, you'll probably want to get income from your nest egg. But should you draw it from your IRA, or your 401(k)? Or maybe your taxable accounts? Or your annuities? Where do you go, and in what order should you draw from your investments?

When it comes to your post-retirement dollars, you want to be as tax efficient as possible. After all, it's not your gross income that's important; it's the amount you get to spend. You can maximize your income and minimize your taxes by withdrawing money in this order:

1. Taxable accounts. Take money first from the accounts on which you've already paid taxes. Why? Under current tax law, capital-gains taxes are lower than ordinary income taxes. If you take money out of your IRA or your 401(k) or other accounts, those dollars are taxed at ordinary income-tax rates, which are higher than capital-gains rates. And once you've spent down your gains, you won't pay any taxes on your original principal investment.

2. IRAs and 401(k)s (tax-deferred plans). You built up these accounts during your working years so you could live on them once you retired. Go ahead and take money from them. But remember, you'll pay higher taxes than on your taxable accounts, so make these investments the second ones you use.

3A. Annuities (non-IRA). (And then there’s 3B.) Why did I split annuities into two categories? When you get income from your non-IRA annuities, you first spend your interest, and then end up drawing from your non-taxable principal (similar to your taxable accounts).

3B. Annuities (IRA). See 3A.

4. Roth IRAs. Yes, these accounts are tax free, but they can also be a marvelous legacy. Imagine if you inherited your parents’ IRAs and kept them in a tax-free account for the rest of your life. What a valuable benefit.

I recommend taking income from your accounts in that order. You'll pay lower taxes and make your money last longer. One last piece of advice: If you don't need to live on the money, don't pay taxes on it. In other words, don't take out more money than you need, because you'll pay taxes on the difference.