Systematic Withdrawal Plan (SWP)

A Systematic Withdrawal Plan, or SWP, is a retirement plan that allows investors to systematically withdraw money from their investment account(s) on a fixed schedule.

Investors often use this retirement plan to have a regular income stream during retirement. They can also use SWPs to gradually sell off investments to rebalance a portfolio or raise cash for other purposes.

SWPs allow you to set up regular payouts from your investments, either monthly, quarterly, semi-annually, or annually.

How Does a Systematic Withdrawal Plan Work?

You can set up an SWP with any brokerage account or investment vehicle, including annuities and retirement funds (like IRAs). As part of your portfolio, the investments you liquidate might be stocks, bonds, or mutual funds.

With an SWP, an investor instructs their investment firm to regularly sell a fixed number of shares or units from their account and deposit the proceeds into their bank account.

For example, let’s say you have $100,000 invested in a stock mutual fund, and you want to receive $500 per month from your investment.

On the first day of every month, you would instruct your investment firm to sell 12,500 shares ($100,000 / $500 per share = 12,500) of the mutual fund and deposit the proceeds into your bank account.

Systematic Withdrawal Plan Benefits

Below are some benefits of using a Systematic Withdrawal Plan:

Flexibility: You can choose the frequency and amount of payouts best.

Regular Income: A SWP provides a steady income stream during retirement, which can be helpful in budgeting and planning your finances.

Tax Efficiency: When you sell investments as part of an SWP, the capital gains from those sales are spread out throughout the plan, which can help to minimize your tax liability.

Capital appreciation: By gradually selling your investments, you can lock in any profits you have made while still keeping some money invested for potential future growth.

Potential Drawbacks of a Systematic Withdrawal Plan

There are also a few potential drawbacks to using a Systematic Withdrawal Plan:

Market Risk: If the market value of your investments goes down, you will have less money to withdraw from your account.

Income Risk: If the amount of income you receive from your SWP is less than you need, it can be challenging to make up the difference.

Fees: Your investment firm may charge fees for setting up and administering an SWP.

Inflation Risk: If inflation goes up, the purchasing power of your fixed income stream will go down.

Sequencing Risk: If you start withdrawing money too early in retirement, you run the risk of running out of money before you die.

Who Can Use SWP?

• Individuals looking for a regular source of secondary income.
• Those who want to gradually sell their investments to rebalance a portfolio or raise cash.
• Individuals wanting to create their pension.
• Individuals looking for capital protection.
• Individuals who are in a high tax bracket.

Tax Efficiency through SWP

When you sell investments as part of a Systematic Withdrawal Plan, the capital gains from those sales are spread out throughout the plan. This can help to minimize your tax liability.

For example, if you have a $100,000 investment and sell $50,000 worth of stock in your SWP. If you sold the stock outright, you would have to pay taxes on the entire $50,000 gain.

But if you spread out the sale for five years as part of your SWP, you would only have to pay taxes on the $50,000 gain in the year you sold it. This can help minimize tax liability and keep more of your money working for you.

When you redeem your units, it is possible to attract capital gain. Capital gains can be short term or long-term as per the following conditions:

• Equity Funds: If you have held your units for less than 12 months, it will be considered a short-term capital gain.
• Non-Equity Funds: If you have held your units for more than 36 months from the allotment, it will be considered long-term capital gains.
• Equity-linked Savings Schemes or ELSS: If you have held your equity-linked savings scheme units for more than 12 months, they will be considered long-term capital gains.

The Bottom Line

A systematic withdrawal plan can be a helpful tool for retirees looking for a regular source of income, and it can also help minimize your tax liability. However, there are also some risks associated with using an SWP.

Before you start an SWP, be sure to talk to your financial advisor to see if it is the right option.

FAQs

1. Is a systematic withdrawal plan safe?

A systematic withdrawal plan can be a safe way to withdraw money from your investments, as long as you do some research before hand.

2. Does SWP have an exit load?

When you withdraw funds within one year, the short-term capital gains tax is 15%, and there is also a 1% exit load.

3. Can the SWP amount be changed?

The frequency and amount of payouts from your SWP can be changed, depending on what works best for you. However, you will not be able to change your plan directly. If you want to increase the amount, you need to start a new SWP for the additional amount that you want.

4. How do you calculate withdrawals?

(Beginning Owner’s Equity + Additional Investment + Net Income) - Withdrawals = Ending Owner’s Equity Assets = Liabilities + Owner’s Equity.

5. What is the difference between STP and SWP?

A systematic Transfer Plan (STP) is an arrangement between two mutual fund schemes, and the investor transfers units from one scheme to another in a pre-determined ratio and frequency. A Systematic Withdrawal Plan (SWP) is an arrangement between an investor and a mutual fund where the investor sells units as per a fixed schedule to receive regular income. An STP helps you rebalance your investment portfolio, while an SWP provides you with a regular income stream. Both STPs and SWPs have exit loads if the units are redeemed within a certain period. STPs have no entry load, while SWPs may have an entry load depending on the mutual fund scheme.