Charles Schwab: 3 Pitfalls to Avoid When Withdrawing from a Portfolio

January 3, 2018 — 11:55 AM EST

During the push to save money for long-term goals – be it retirement or a summer home – investors get a lot of advice. But when it comes to withdrawing money to bankroll those goals, mistakes abound. In fact, according to The Charles Schwab Corporation (SCHW), there are some big mistakes – from withdrawing funds all at once to dropping the ball on other goals.

Take withdrawing the money all at once for starters. According to the San Francisco-based discount broker, depending on the amount of money a saver is looking to withdraw, it may make more sense to break it up over several years to avoid a big tax hit. Robert Aruldoss, a senior financial planning research analyst at the Schwab Center for Financial Research, said in a post that selling sizeable assets in one calendar year versus spreading sales out over two or more years can increase your taxable income and even push you into a higher tax bracket. "If you're near the upper end of your tax bracket, withdrawing a large amount of capital across several years can shave percentage points off your tax bill," Aruldoss said. To see more about what Charles Schwab offers customers, check out the Charles Schwab review.

Another big mistake investors make when withdrawing large sums is going to great lengths to avoid selling any investments at a loss. Loss aversion drives many investors and often results in investors ignoring underperforming investments. While losses are hard to stomach for all sorts of people, Aruldoss said that it would help with the tax bill, particularly when you are withdrawing large sums. Known as tax-loss harvesting, this happens when investors pair a losing stock with a winning one. By doing that, investors can offset capital gains, resulting in less taxes owed to Uncle Sam.

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What's more, Aruldoss said that investors withdrawing a lot from their portfolio should use the time to rebalance their investments. "As withdrawals and market fluctuations alter the proportions of your portfolio holdings, your asset allocation may stray from its target," he said, noting that this could cause some investments to be overweight while others may end up underweight.

A final big mistake that many investors who have reached a goal make is to neglect their other plans as they withdraw money. According to Aruldoss, while it is easy to lose sight of an investment plan when a major milestone is reached, it is not the time to relax. Investors have to ensure that their overall finances are still in order, particularly if they are still saving for their retirement. "The money you were putting away to reach the goal you just achieved can now be reallocated to help you meet other ones," Aruldoss said. "Very few people save and invest just to have a big portfolio to admire. For most of us, reaching our goals means eventually spending the money or leaving it to our heirs. That's really what it's all about."