WHEN TAPPING RETIREMENT SAVINGS

PAY ATTENTION TO TAXES3 Strategies for Minimizing What You Owe If you’re like most retirees, you keep your financial assets in a variety of accounts. Tapping them in the right sequence could potentially extend the life of your portfolio. Simple rules of thumb can guide the way, while more sophisticated strategies could help you save thousands of tax dollars every year.

CASH FLOW STR ATEGIES

Why Taxes Matter In retirement, your earned income may decline to zero—but the Internal

Revenue Service isn’t nearly finished with you. Saving on taxes becomes

especially important in retirement, because your investments may not be able

to keep pace with high—and possibly avoidable—taxes you may be paying.

Having your retirement savings in several accounts that receive differing tax

treatments opens up opportunities for tax-saving strategies that may help add

years to your portfolio. The impact of these strategies increases with your level

of wealth and rate of return on assets.1

Because tax matters tend to be complicated, we suggest consulting with your

tax advisor before making any significant tax-related decisions.

Take Action NowPlanning ahead can help you avoid paying excess taxes. Beginning on the next page, there are three steps you may want to consider:

Know Your Tax Rates Pay attention to rates so you’re well positioned to apply tax-saving strategies

2016 Tax Table

Single Taxable Income

Married Filing Joint

Taxable Income

Ordinary Income

Tax Rates

Long-term Capital-Gain

and Qualifying Dividend

Rates

$0–$9,275 $0–18,550 10% 0%

$9,276-$37,650 $18,551-$75,300 15% 0%

$37,651-$91,150 $75,301-$151,900 25% 15%

$91,151-$190,150 $151,901-$231,450 28% 15%

$190,151-$413,350 $231,451-$413,350 33% 15%

$413,351-$415,050 $413,351-$466,950 35% 15%

$415,051+ $466,951+ 39.6% 20%

Source: IRS

“Taxable Income” is income that remains after taking the standard deduction/personal exemption.

Minimize Taxes Through Asset Location When buying investments, consider asset location—the process of investing across taxable, tax-deferred and tax-free accounts with the goal of creating opportunities for tax-efficiency. For example, interest from Treasury and corporate bonds is subject to ordinary income tax. By contrast, qualified stock dividends and stocks held longer than 12 months are subject to a more favorable long-term capital-gains rate. Because Traditional IRA and 401(k) distributions are subject to ordinary income tax rates, consider making your bond investments in these accounts and making your long-term stock investments in your taxable accounts. Because distributions from qualified Roth IRAs are tax-free, these accounts may be suited to holding assets with higher return potential but lower tax efficiency, such as real estate investment trusts.

1 Source: William Reichenstein, “Tax-Efficient Sequencing of Withdrawals in Retirement,” TIAA-CREF Institute, October 2006

2 Source: Colleen Jaconetti and Maria Bruno, “Spending from a Portfolio: Implications of Withdrawal Order for Taxable Investors,” The Vanguard Group Inc., 2008

STEP 1: LEARN THE RULES OF THUMBGenerally speaking, you’ll save the most in taxes by withdrawing assets in the following sequence:

• First, tap taxable accounts, like brokerage accounts. In many cases, the sale of assets from these accounts are generally taxed at the relatively low capital-gain rates (see “2016 Tax Table,” previous page). In addition, you may be able to offset these taxes by selling investments that have lost value.

• Next, tap tax-deferred retirement accounts, including your Traditional IRA and 401(k) plan. These distributions are taxed at ordinary income tax rates, which are frequently higher than capital-gains rates. If you wait to tap these accounts until after you have depleted your taxable accounts, you may be in a lower tax bracket. Meanwhile, you can continue deferring tax payments on these accounts until you need the money.

• Last, tap tax-free accounts, such as the Roth IRA or Roth 401(k). If the assets in your Roth IRA outlive you, your heirs can withdraw from them without paying federal tax (subject to certain conditions).

A study by Vanguard found that spending from a taxable portfolio before a tax-deferred portfolio increased the chances of a portfolio lasting for 30 years by up to 8 percent.2

STEP 2: KNOW THE EXCEPTIONSThere are several exceptions to the general order-of-withdrawal rule detailed above. They include:

• After you turn age 70½, you must start taking annual required minimum distributions (RMDs) from your Traditional IRA and other qualified plans. Failure to do so results in a penalty of 50 percent of the RMD amount.

• If you expect your future tax rate to decrease over time, whether due to new tax laws or a change in your financial situation, you may want to tap tax-free accounts first and wait until your tax rate decreases to pay the taxes on distributions from taxable or tax-deferred accounts. Vanguard’s study found that this strategy tended to increase portfolio longevity.

• If you have a large investment gain in a tax-deferred or a taxable account, consider leaving the taxable assets to your heirs and donating the tax-deferred assets to a charity. If you sell the assets, you would owe capital-gain taxes on the full amount of the gain. But if you leave the taxable assets to your heirs, they may only owe taxes on gain that occurred after your death. If you donate the tax-deferred assets to a charity, you (or your estate) will again avoid capital-gain taxes and may also be eligible for a tax deduction.

STEP 3: MANAGE YOUR BRACKETA more active strategy for minimizing taxes involves strategically withdrawing from different accounts with the goal of keeping your income tax bracket as low as possible. It’s a two-step process, undertaken annually:

• First, estimate your income gap for the coming year. That’s your living expenses minus expected sources of income (pensions, annuities or Social Security, for example).

• Next, determine the mix of withdrawals that will allow you to fill that income gap while also minimizing your tax bracket.

The example below shows how this might work. Please keep in mind that the example does not account for the different tax treatment of some income sources, such as Social Security. But the principle is the same: By selectively withdrawing from accounts with different tax treatments, you may be able to minimize your taxable income.

Jerry and his wife, Carol, both 66, expect a taxable income of $50,000 next year. Their retirement needs are $100,000, creating an income gap of $50,000. If they fund the full $50,000 with a taxable 401(k) distribution, they will land in the 25 percent tax bracket (for taxpayers with income of $75,301 or more). Instead, Jerry withdraws just enough from his 401(k) account—$25,300—to reach the top of the 15 percent bracket. They fill the rest of the $50,000 gap with $24,700 from Carol’s tax-free Roth IRA. They save $8,705 in taxes as a result.

Past performance is no guarantee of future results.

The tax information contained herein is provided for informational purposes only and should not be construed as legal or tax advice. Circumstances may change over time, so it may be appropriate to evaluate tax strategy with the assistance of a professional tax advisor. Federal and state tax laws and regulations are complex and subject to change. Laws of a particular state or laws that may be applicable to a particular situation may have an impact on the applicability, accuracy or completeness of the information contained in this document. Janus does not have information related to and does not review or verify particular financial or tax situations. Janus is not liable for use of, or any tax position taken in reliance on, such information.

A retirement account should be considered a long-term investment. Retirement accounts generally have expenses and account fees, which may impact the value of the account. Nonqualified withdrawals may be subject to taxes and penalties. For more detailed information about taxes, consult a tax attorney or accountant for advice.

Investing involves market risk and it is possible to lose money by investing. Investment return and value will fluctuate in response to issuer, political, market and economic developments, which can affect a single issuer, issuers within an industry, economic sector or geographic region, or the market as a whole.

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