Systematic Withdrawal Plan

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 In addition, this withdrawn amount can serve various purposes.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.

• 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.

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.

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.

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.

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.

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.

This article has been a guide to what is a Systematic Withdrawal Plan. We explain its taxation, examples, advantages, disadvantages & compare it with dividends. You may also find some useful articles here -

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