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401k's - Question For Conservative Savers/Investors
Old 06-20-2019, 01:24 PM   #1
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401k's - Question For Conservative Savers/Investors

Just looking for suggestions or comments on the decision of withdrawing funds from 401k's and other investment accounts.

Currently retired at 59 with a generous pension which includes paid medical/dental. Our home is also paid off and we easily live off my pension and then some. My issue is that both my wife and I also have 401k's along with a "hobby" stock investment account with around $150,000. in it. We also have a very sizable cash savings.

We don't necessarily need to touch any of these investments at this point but I fear if we wait to long we'll be taking such large sums later in life that it'll drastically raise our income tax rate and we'll be forced to pay more in taxes then simply starting to chip away with withdrawing now and hopefully paying less taxes.

I realize we can roll these 401k's over into an IRA but that doesn't really change the basic question of withdrawing money without screwing ourselves with taxes down the road. Prior to retiring we moved our 401k's into fairly conservative investments but of course nothings totally protected with the exception of our CD's. I'd basically just like to keep what I have now that I'm at a comfortable and secure investment level.

Anyone else find themselves in this same or similar position?
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Old 06-20-2019, 01:32 PM   #2
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I pulled what would amount to my 1st RMD from the IRA this year at age 64.
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Old 06-20-2019, 01:36 PM   #3
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Are you familiar with ROTH conversions? There was a big thread on here, but I think it has rolled off the front page. Basically, prior to drawing Social Security, you want to convert those pre-tax funds to ROTH funds. You will need to pay the taxes on it, but you make sure to use up the tax brackets at the lower rates. Then when you reach RMD age, the combination of SS plus Pensions plus RMDs (hopefully) will not push you into the higher tax brackets.
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Old 06-20-2019, 01:36 PM   #4
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There have been several recent threads on accelerating tax deferred withdrawals sooner than later to avoid higher takes once RMDs start.
You have to lay out which bracket you're in now and which bracket you'll be in at age 70.5 (pending legislation) when RMDs start... including how much of your SS will be taxed.
My opinion: Tax rates are as low as they are going to get, max out your current tax bracket now.
Also... you'll have to assess for yourself how secure your pension is going to be based on how well funded it is. If you're in Illinois or some such, I wouldn't bank on a full pension.
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Old 06-20-2019, 01:53 PM   #5
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Quote:
Originally Posted by Drake3287 View Post
....I fear if we wait to long we'll be taking such large sums later in life that it'll drastically raise our income tax rate and we'll be forced to pay more in taxes then simply starting to chip away with withdrawing now and hopefully paying less taxes.

I realize we can roll these 401k's over into an IRA but that doesn't really change the basic question of withdrawing money without screwing ourselves with taxes down the road. ...
What your marginal tax rate when you deferred that income? What will your marginal tax rate on that income be?

It's likely that the income that you will ultimately pay on your 401k withdrawals will be less than the tax that you avoided when you deferred that income so you will come out ahead as you epected to when you deferred that income and took the tax break... so you are not screwing yourselves at all.

OTOH, if it ends up that you will ultimately pay more in taxes than you saved when you deferred that income then you have ended up being much more successful than you thought you would be when you deferred that income... so congratulations!

All of that said, it would likely be best to do some withdrawals now to levelize your income and avoid later withdrawals moving you to a much higher tax bracket... so you could do withdrawals or roth conversions to the top of your current tax bracket or perhaps even the next tax bracket.
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Old 06-20-2019, 02:49 PM   #6
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If you have other money to live on, I would do conversions. If not, start withdrawals.

Use a spreadsheet to take a shot at what your income and tax rate would be once you start taking RMDs and SS, and try to flatten out the income over the years. Ideally you would convert/withdraw up to the top of the same tax bracket that you would be in after age 70.5.

Of course it's a little tricky with the moving parts. If you convert now, your RMDs are reduced, so you just have to find the balance. If you want to try to take an ACA subsidy that changes the calculations too. You may have to convert a lot less. Or maybe you decide the subsidy isn't worthwhile, and you convert full-throttle. Or do an every-other-year plan.

Or you could try a tool like i-orp. Many find it seems to be overly aggressive with converting but it might at least give you some ideas.
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Old 06-20-2019, 05:30 PM   #7
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Quote:
Originally Posted by pb4uski View Post
What your marginal tax rate when you deferred that income? What will your marginal tax rate on that income be?

It's likely that the income that you will ultimately pay on your 401k withdrawals will be less than the tax that you avoided when you deferred that income so you will come out ahead as you epected to when you deferred that income and took the tax break... so you are not screwing yourselves at all.
While above is certainly true and important, I would suggest it is important when making the contributions (either traditional or Roth account).

An astute friend told me just this Tuesday it all depends on why you want to move to the Roth. From your post, I will deduce it is for tax reasons. I find myself in same situation, income from pensions, SS, and rental property are plenty for needs and some travel. At 63, and just retired last year, I’m going to max out the 22% marginal bracket best I can with a conversion to Roth. This year will be a bit tricky with first year no salary and DW starting SS, but by 2020 taxes I should be able to compute my expected income, deduct $24K for standard deduction, and subtract that from $178K which is top of 22%.

Worst case I will have lower RMD at 70.5 than I would have without doing any conversions.

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