One benefit of investing through the use of mutual funds is the level of flexibility provided by funds and the fund companies. Just as a mutual fund will let you make regular periodic investments, most funds will allow you to set up monthly fixed redemptions from your account. While the steps to set up a withdrawal plan are pretty straightforward, there are some additional factors to consider before sending the form off to your mutual fund company.
Systematic Withdrawal Plan
To set up monthly redemptions from your mutual fund account, contact the fund company and request a systematic withdrawal plan form. The typical withdrawal form requires you to enter your account information and the details of how you want to receive withdrawals. You can select a dollar amount to be redeemed from your fund account and mailed to you monthly, quarterly or annually. The fund can send the money by check or as a deposit into a bank account. To change your redemption plan, complete another copy of the form and send it in to the fund company.
Amount to Withdraw
Financial advisers have long used 4 percent as an annual withdrawal amount that would allow an investment account to last indefinitely and regularly increase the withdrawals to keep up with inflation. If you set up redemptions from your fund for more than 4 percent or so per year, you should be prepared for the account value to decrease over time. If the account value does fall, you redemption amounts will become a higher percentage of the remaining value. Four percent is just a rule of thumb and you should base your withdrawal amounts on the historical and expected returns of the fund and whether or not you are OK with drawing down the account value.
Systematic redemptions from your mutual fund account will result in the sale of fund shares every month to cover your withdrawal amount. At the end of the year, your tax reporting tasks will include declaring dividend and capital gains distributions from the fund plus capital gains or losses on the shares that were redeemed. When reporting capital gains or losses, you can choose from three ways to calculate cost basis. The mutual fund company also reports cost basis information on the IRS Form 1099 covering sales of shares. Make sure the fund company's basis calculation method matches the one you will use on your tax return.
Advanced Withdrawal Options
The standard mutual fund withdrawal plan is a fixed dollar amount each month. An article in Forbes magazine in 2010 discussed more advanced withdrawal plans being developed by the fund companies. The newer types withdrawal plans combine different funds with asset allocation strategies to allow withdrawal options that meet specific income needs, such as maximum income while preserving capital or making a fund account last a specific number of years. If you are looking for something besides a monthly fixed dollar amount, talk to the fund company or a financial adviser.