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401K & IRA withdrawals
Old 08-20-2008, 02:51 PM   #1
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401K & IRA withdrawals

I have been retired an using our taxable money to supplement ss and a pension. Need about 52K a year, ss+pension is around 38K.

Have over 700K in IRA and 401K.

Looking at the tax considerations:
It appear that if you stay under 65K then taxes are 10%.

Should I be taking some from the non taxables now and putting it in to a taxable account or just use up the taxable accounts and then start using the ira/401K.

What is the best way to lesson the tax burden ?
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Old 08-20-2008, 03:03 PM   #2
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bobbee, I am sure you will get some quality responses from others here that know infinitely more about this subject than I do. In the meantime you might want to look at www.i-orp.com

"The Optimal Retirement Planner (ORP) is a retirement calculator that optimally schedules retirement savings and withdrawals to maximize the amount of money available for spending throughout retirement. "
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Old 08-20-2008, 03:34 PM   #3
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The short answer is it depends on a lot of factors. Probably the most important is your age. Assuming you are between 62 and 70.5, you do have a lot of flexibility.

In general you have a trade off of taking advantage of a low tax bracket by withdrawing money from your IRA before you are required to vs subjecting your social security benefits to taxation. With an SS+pension of 38K you are right at the borderline for not having SS benefits taxed at all. When you turn 70.5 you will be required to withdraw approximately 25K a year, there is a good chance IMO that tax rates will be higher in the future, but who really knows.

One possible strategy is to alternate withdrawal years (up to the top of your tax bracket) from your IRA with no withdrawals the next year. The impact would be that you would pay some income taxes during withdrawal years and very little if any during other years.


I have not used the withdrawal calculator but it looks very useful.
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Old 08-20-2008, 03:59 PM   #4
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Quote:
Originally Posted by bobbee25 View Post
Looking at the tax considerations:
It appear that if you stay under 65K then taxes are 10%.
Actually, for joint filers in 2008, the 10% bracket tops out at 16,050 for taxable (after deductions and exemptions) ordinary income. The 15% bracket goes up to 65,100, so taxable income between 16,050 and 65,100 would be taxed at 15%.
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Old 08-20-2008, 04:09 PM   #5
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I haven't looked at the ORP yet, but I will. I have similar concerns about MRD and taxes. I have asked three different financial planners, no four, and they all punted. They told me I needed to discuss it with a tax accountant. (What do financial planners do for a living?) Anyway, I've been pulling out money from the tax deferred plan in years with lower income and stuffing it into ROTH accounts. I'll check that ORP to see what it recommends.
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Old 08-20-2008, 04:25 PM   #6
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My vote would be to do Roth conversion.
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Old 08-20-2008, 05:58 PM   #7
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Quote:
Originally Posted by bobbee25 View Post
I have been retired an using our taxable money to supplement ss and a pension. Need about 52K a year, ss+pension is around 38K.

Have over 700K in IRA and 401K.

Looking at the tax considerations:
It appear that if you stay under 65K then taxes are 10%.

Should I be taking some from the non taxables now and putting it in to a taxable account or just use up the taxable accounts and then start using the ira/401K.

What is the best way to lesson the tax burden ?
Remember to factor in std deduction and personal exemptions for you and wife.

$66100 is cap of 15% bracket (which is really $66100+$10900 (std deduction)+$3000 (two exemptions)=$83000. Meaning you can withdraw 83k from IRA and still be in 15% tax bracket.

One suggestion to consider is to withdraw the 52k you need to live off of, then convert another 31k to a Roth IRA each year. The goal would be to have money in Roth before age 70.5 so you can live tax free and avoid RMDs.
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Old 08-21-2008, 09:07 AM   #8
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limit

Can I just convert from a std IRA to a Roth, isn't there a limit or earning requirement ?
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Old 08-21-2008, 09:09 AM   #9
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Originally Posted by bobbee25 View Post
Can I just convert from a std IRA to a Roth, isn't there a limit or earning requirement ?
An excellent online source for information on converting to a Roth IRA is fairmark.com.
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Old 08-21-2008, 12:53 PM   #10
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Can I just convert from a std IRA to a Roth, isn't there a limit or earning requirement ?
Yes- to do the conversion has an income requirement. I believe it is around AGI of 100k- I ran into this when I tried to convert a rollover to a roth a few years back.

The fairmark referral is a good one- that is where I go for tax advice.
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Old 08-21-2008, 06:33 PM   #11
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But can you convert to a roth from an IRA if your only income is pension + ss.
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Old 08-21-2008, 06:57 PM   #12
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But can you convert to a roth from an IRA if your only income is pension + ss.
Yes. As long as your AGI is less than 100K is the figure stuck in my mind. Fairmark Forum has that info. In 2010 all income limits go away. My goal is to convert some each year to the top of my tax bracket.
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Old 08-21-2008, 09:05 PM   #13
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But can you convert to a roth from an IRA if your only income is pension + ss.
Yup, you can even convert some of your IRA to Roth and decide next year that heck the taxes didn't work out the way I wanted. You then tell your IRA trustee (e.g a broker) I changed my mind, please reverse my conversion. This is called recharacterization and the IRS gives you a lot of time to change your mind.

On the other hand unless you have a big source of income that you have not discussed, I think your taxes should be pretty modest.
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Old 08-21-2008, 10:26 PM   #14
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Also, you can convert this year and pay the taxes quarterly. Same for 09. But conversions in 2010 you can pay the taxed in 2011 & 2012!
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IRA to Roth IRA Conversions
Old 08-22-2008, 08:48 AM   #15
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IRA to Roth IRA Conversions

Quote:
Originally Posted by jIMOh View Post
Remember to factor in std deduction and personal exemptions for you and wife.

$66100 is cap of 15% bracket (which is really $66100+$10900 (std deduction)+$3000 (two exemptions)=$83000. Meaning you can withdraw 83k from IRA and still be in 15% tax bracket.

One suggestion to consider is to withdraw the 52k you need to live off of, then convert another 31k to a Roth IRA each year. The goal would be to have money in Roth before age 70.5 so you can live tax free and avoid RMDs.
Beginning in 2010 there are no restrictions on conversions for those over 62 years of age.

However, everyone's situation is different and rules of thumb can be misleading. (Rules of dumb, Kotlikof calls them in his excellent book "Spend 'til the End".) Situational uniqueness is why we do do computer based modeling. IRA to Roth IRA conversions are really all about the progessive Federal personal income tax + state taxes. i-orp.com, mentioned earlier, does a comprehensive job of modeling the tax situation visa via conversions.
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Old 08-22-2008, 05:16 PM   #16
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Bobbee,

I don't think anyone has mentioned it specifically (though I'm guessing it is addressed in the calculators) but consider what happens to your MRDs if you DON'T take some money out now. A SWAG on my part would be that your 700K might grow to 1M by the time you are 70 1/2 and that your RMD factor might be based on a 25 year survival. Continuing my SWAG that would mean you would be forced to withdraw about 1000K/25 or about 40K your first year as an MRD (others with better knowledge please correct me). That's 40K whether you need it or not. And its all taxable that year.

Withdrawing the money now and paying the taxes reduces your future MRDs, offering you more flexibility and possibly lower taxes over your lifetime. When to take SS also figures into these calculations - hope it's addressed in the calculators.

I'm doing this myself as I figure it will ultimately save me taxes. (Actually converting to Roths's) My tax accountant rolls his eyes as he believes in the old adage "delay taxes as long as possible".

YMMV

Good luck!

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Old 08-23-2008, 09:31 AM   #17
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Bobbee,

I don't think anyone has mentioned it specifically (though I'm guessing it is addressed in the calculators) but consider what happens to your MRDs if you DON'T take some money out now. A SWAG on my part would be that your 700K might grow to 1M by the time you are 70 1/2 and that your RMD factor might be based on a 25 year survival. Continuing my SWAG that would mean you would be forced to withdraw about 1000K/25 or about 40K your first year as an MRD (others with better knowledge please correct me). That's 40K whether you need it or not. And its all taxable that year.

Withdrawing the money now and paying the taxes reduces your future MRDs, offering you more flexibility and possibly lower taxes over your lifetime. When to take SS also figures into these calculations - hope it's addressed in the calculators.

I'm doing this myself as I figure it will ultimately save me taxes. (Actually converting to Roths's) My tax accountant rolls his eyes as he believes in the old adage "delay taxes as long as possible".

YMMV

Good luck!

Koolau
I think that there is a moral here about going to an accountant for financial consultation. IMHO you, and several others on this blog, have it right. Partially roll over your IRA to your Roth IRA, taking care not to jump into a higher than appropriate tax bracket. The acedamic research supports this strategy. What's interesting is that a retiree with a large IRA and a large after-tax account can effectivally practice this strategy even it it put her in the 35% tax bracket. Beware rules of thumb.
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i-orp
Old 09-18-2008, 07:16 AM   #18
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i-orp

Using i-orp, it shows more after tax income with a standard IRa then If I switch and put the same numbers in the Roth. /?//
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Old 09-23-2008, 07:48 AM   #19
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Using i-orp, it shows more after tax income with a standard IRa then If I switch and put the same numbers in the Roth. /?//
I think ORP is trying to tell you something. The whole reason for ORP's optimization is to idenify withdrawal plans that are not obvious to the naked eye.
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