A systematic withdrawal plan is a type of payout plan set up by a mutual fund company that allows you to make withdrawals of a fixed or variable amount at regular internals. There are two types of SWP:
Capital Retention Systematic Withdrawal Plan (CRSWP): The goal of this type of SWP is to pay out a fixed percentage of the account each year with the full intention of retaining capital. The amount of each withdrawal is determined by applying a set percentage (e.g., 4%) to an average account balance over a specified period (e.g., the average account balance over the previous three years).
Capital Depletion Systematic Withdrawal Plan (CDSWP): With this type of plan, the goal is to pay out both principal and accrued income at a steady rate that is expected to deplete the account in its entirety by some target date in the future.
Like an annuity, SWPs are designed to spread distributions of your account balance over your lifetime or some pre-determined period. However, unlike an annuity, SWPs give you the added flexibility to withdraw money without penalty. Keep in mind that in some cases, if your SWP is applied to a tax-advantaged account, like your IRA, and you attained age 70½ (or if you are a beneficiary), you may have to withdraw an additional amount in some years to avoid a minimum distribution tax penalty.
Before you commence a systematic withdrawal plan, study it to determine whether it might be appropriate for your retirement income needs. Although the Savings Plan doesn’t provide an SWP withdrawal option, a financial advisor can help you determine how much to withdraw from your account at specific intervals to help you meet your retirement income objectives.
A gift tax is a federal tax applied to an individual giving something of value to another person. When you gift an asset, you are responsible for paying the gift tax, but there are ways around it. The following are generally excluded from gift tax:
1. Gifts to your spouse
2. Gifts to a political organization for use by the political organization
3. Gifts that are valued at less than the annual gift-tax exclusion for a given year ($13,000 as of 2009)
4. Medical and education expenses such as payments made by a donor to a person or organization such as a college, doctor, or hospital.
It’s important that you name a beneficiary when enrolling in a savings plan. If you are not married, this ensures your retirement accounts pass to your beneficiaries without going through probate. If you are single, you are free to name anyone as your beneficiary. If you are married, you are required to name your spouse as the primary beneficiary UNLESS your spouse signs a written waiver.
You can name more than one beneficiary to share in the proceeds by specifying the percentage each beneficiary will receive (the shares do not have to be equal).
Keep in mind that any amounts you leave to someone other than your spouse under the plan are counted as part of your estate for estate tax purposes. (Federal estate tax applies to estates with more than $3.5 million in total assets in 2009. Although the federal estate tax does not apply to those who die in 2010, it applies to estates worth over $1 million in 2011). In addition to the federal estate tax, your state may impose an estate tax and provide for exemptions that are lower than these levels. If your total estate exceeds $1 million, it may end up being subject to the federal estate tax, so consider discussing your situation with an estate planning attorney.