Systematic Withdrawal Plan

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21 Aug, 2024

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A systematic withdrawal plan, or SWP, is a withdrawal plan where investors can withdraw a certain amount from their existing mutual fund. The main purpose of this plan is to allow them to withdraw money from the current mutual fund at certain intervals.

Investors mainly use a systematic withdrawal plan for retirement purposes. It enables investment in smaller amounts periodically. Also, it acts as a source of regular income. In addition, this withdrawn amount can serve various purposes. However, as mentioned above, it is only suitable for catering to the needs of retirees.

What Is Systematic Withdrawal Plan (SWP)?

A systematic withdrawal plan, or SWP, is an investment scheme where individuals can withdraw a part of their invested amount every month. It does not affect its Net Asset Value.
SWP is possible in various instruments like mutual funds, Internal Retirement accounts (IRAs), debt funds, annuities, 401k, and other schemes.
It is more suitable for investors planning for retirement or long-term investing. Likewise, capital gain tax is applicable on redeemed units.
Although SWP and dividends provide passive income, the latter does not provide a withdrawal scheme.

How Does A Systematic Withdrawal Plan (SWP) Work?

A systematic withdrawal plan is a withdrawal plus investment scheme issued by mutual funds (MFs). It allows individuals to invest in an MF and withdraw a part of it every month or quarter. Mostly, it is a part of retirement plans. However, it is suitable for investors planning long-term investing.

Systematic withdrawal plans can occur for any asset instrument. It includes mutual funds, annuities, 401k, and IRAs (individual retirement accounts). To access systematic withdrawal plan schemes, an individual must first invest in a Systematic Investment Plan (SIP) or any other scheme. Later, they can choose SWP, which allows them to withdraw money from the invested amount either monthly or quarterly. However, they need the least amount in their IRA or mutual fund scheme to avail of SWP. Besides, individuals adopting systematic withdrawal plans for retirement under the Internal Revenue Service (IRS) must fulfill additional requirements.

Let us look at the features and characteristics of systematic withdrawal plans in mutual funds:

Long-term, regular income, and tax efficiency
Easy redemption of units.
Investors can choose the withdrawal frequency and amount.
They can either withdraw a fixed amount or the appreciated value.

Examples of SWP Mutual Fun

Let us look at the examples of systematic withdrawal plans to understand the concept better:

Example #1

Suppose Edwin is an investor who earns good returns every year. In contrast, his portfolio manager explains systematic withdrawal plans in mutual funds. Accordingly, Ronit could withdraw a certain amount whenever he wanted. Likewise, he selects (link 2) the amount type, frequency, and withdrawal date. As a result, the fund house will continue to give money on the SWP date. So, if Edwin wants to withdraw $10,000, the fund house will redeem 1000 units every month to him.

Example #2

According to a meeting held in November 2022 by the Securities Exchange Board of India (SEBI), the limit (link 1) on registering systematic withdrawal plan forms has been reduced. In addition, the limit on the redemption of units is also excluded.

Taxation

Since SWPS are a type of asset class, there will be capital gain tax implications on SWPs. Also, it will differ from nation to nation. So, let us look at the tax calculation on systematic withdrawals.

Every time an investor withdraws money, there is a redemption of units. And this attracts a capital gain or capital loss. The IRS says the capital gain tax is no more than 15%. Nevertheless, the Indian government allows the redemption of units after a year with a tax rate of 15%. Similarly, the Australian taxation system imposes a tax rate equal to the amount gained for units sold within 12 months. Thus, investors can work with their tax advisor and save on taxes.

Advantages And Disadvantages

Systematic withdrawal plans can be the best option for individuals planning for retirement. This is because they can earn a regular, fixed, passive income. Therefore, the gain on the redemption of units is useful for paying various expenses. Also, they are less affected by market volatility. However, fund managers could sell extra units to match the withdrawal amount. As a result, the investment amount could be reduced. In addition, there will be an exit load applicable along with capital gain.

Advantages	Disadvantages
Automatic Withdrawals	More beneficial for retirement planners
Less affected by market volatility	Exit load appears
Regular source of income	Attracts short-term capital gain
Feasible to pay expenses
Useful for retirees

Systematic Withdrawal Plan vs Dividend

Although systematic withdrawal and dividend plans are mutual fund schemes, they differ slightly. The former allows individuals to withdraw certain money from the existing scheme. It provides a passive source by redeeming the units. In contrast, the latter does not allow any withdrawals, providing a dividend on the units owned. In the former case, the withdrawals do not affect the NAV. Whereas the latter reduces the NAV. However, both provide a passive income to the investors.

Basis	Systematic Withdrawal Plan	Dividend
Meaning	SWP is an investment plan where an investor can withdraw a fixed monthly amount.	Investors earn a dividend as a part of profits without redeeming units.
Purpose	To withdraw money by redeeming the units from the existing mutual fund.	To earn a dividend on the units invested.
Net Asset Value (NAV)	Does not affect NAV.	It lowers the Net Asset Value (NAV)
Withdrawal	Possible	Fund managers will not guarantee withdrawals.
Suitable for	Retirees	Anyone

Frequently Asked Questions (FAQs)

How to start a systematic withdrawal plan?

Following are the steps to start an SWP in a mutual fund or scheme. Let us look at them:
● Open the respective broking platform or mutual fund house.
● Ask for a "Systematic Withdrawal plan" form.
● Fill in the details like withdrawal type, SWP date, amount, and other personal details.
● Once filled, submit it to them.
● Now, you can withdraw the amount.

What is systematic withdrawal from an annuity?

It is similar to SWP, where individuals or annuitants can withdraw money from their existing annuity. Investors also refer to it as a systematic withdrawal schedule.

Is a systematic withdrawal plan safe?

SWPs offer assured returns with nearly no risk while making withdrawals. Also, individuals have the option to either choose a fixed amount or the capital appreciated value. Yet, they have an exit load chargeable as it involves unit redemption.