Successfully planning for your retirement takes a lifetime of hard work and dedication. After going to all that trouble to provide for your golden years, the last thing you want is to blow it by making mistakes when the time comes to start spending down your retirement savings.

IRAs, 401(k) plans, and other methods of saving for retirement give you valuable tools that you can use to boost the value of your portfolio. When you start taking money out of these accounts, though, you need to remember that there's more involved than just asking for a check. Smart planning can make a huge difference in how much of your hard-earned money you actually get to keep.

How the IRS gets its due
Some of the best features of retirement accounts are their tax benefits. Traditional IRAs and 401(k) plans, for instance, give you a current tax deduction that can save you thousands in income taxes year after year.

After you retire, though, it's payback time for the IRS. Every time you take money out of a traditional IRA or 401(k), you create taxable income that will usually increase your tax bill. In addition, if you decide to retire before you turn 59 1/2, then an additional 10% penalty may apply if the withdrawal doesn't qualify for one of many exceptions to the penalty rules.

Given this, many investors choose to go with Roth IRAs if they can. But even with Roths, you'll want to be careful: Once you take money out of the Roth, it no longer generates tax-free income for you.

With the tax man in mind, here are three ideas to ponder as you start spending down your retirement accounts.

1. The clock's ticking.
Eventually, the IRS forces you to start taking money out of your traditional IRAs and 401(k)s. At age 70 1/2, you have to start taking required minimum distributions from your account. The amount you have to withdraw depends on your age and the total value of your retirement accounts.

Because you'll have to take withdrawals anyway, it's best to do so on your schedule. If you wait, then the amount you're required to take may be so large that it puts you into a higher tax bracket, potentially costing you thousands in extra tax. Therefore, it might make sense to take smaller amounts early, even before you have to. That way, you'll be able to control your taxable income and minimize your tax burden over the years.

2. Figure out how to get paid.
Different retirement accounts offer different choices about how you receive money. With IRAs, you're responsible for investing all the money in your account. To convert that money into a monthly payment resembling a pension, you have to buy an immediate annuity on your own.

With 401(k) plans, however, some have discussed the possibility of automatically including annuities among your payment options. Such an option would let you choose how long you want to receive monthly checks, or offer the ability to have your spouse receive payments even after you pass away. Your monthly payment would change depending on which option you select. Until such an option exists, though, you can either arrange for withdrawals from the 401(k) or roll it over into an IRA if it's more convenient.

3. Stay smart with your investments.
After you retire, you'll want your portfolio to be somewhat more conservative than it was when you were younger. Unfortunately, many great-performing stocks, such as Intuitive Surgical (NASDAQ:ISRG) and Cisco Systems (NASDAQ:CSCO), don't give you any income. And at today's low interest rates, you'll have trouble generating enough income to cover your required distributions with traditional fixed-income instruments like bonds or CDs.

That's where dividend stocks can help. The dividends these stocks pay can help you with living expenses and meet your IRS obligations at the same time. For instance, all the stocks below have yield at least 5% and have a favorable reputation among our Motley Fool CAPS community:


CAPS Rating

Current Dividend Yield




Bristol-Myers Squibb (NYSE:BMY)



Lorillard (NYSE:LO)



Eni (NYSE:E)



Enterprise Products Partners (NYSE:EPD)



Source: Yahoo! Finance, Motley Fool CAPS.

Those yields could provide enough income to cover most or all of your required minimum distributions, giving you more latitude to focus on other considerations with the rest of your portfolio.

So if you're about to retire and have your finances in shape, then congratulations -- but don't rest on your laurels just yet. Figuring out the best way to spend your nest egg will help you ensure it lasts as long as you need it.

Are you ready to retire? If not, Dayana Yochim thinks it's time for you to start worrying. Seriously.

Fool contributor Dan Caplinger used to think happiness was a warm blanket, but now he finds seeing his brokerage account balance going up to be more soothing. He doesn't own shares of the companies mentioned in this article. Intuitive Surgical is a Motley Fool Rule Breakers selection. Enterprise Products Partners is a Motley Fool Income Investor recommendation. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy is never insecure.