A better way to withdraw from an IRA?

[BrianB]

In my never ending quest to squeeze nickels out of c-notes, I found an idea in a post on another forum. The idea is to do a Roth conversion of planned Traditional IRA spending money at the beginning of the year and then take monthly spending from the Roth, letting the interest accumulate in the Roth instead of the Traditional IRA..

Our IRA withdrawals for 2019 (and for 2020) are planned to be $36k from a Traditional IRA and $18k from a Roth IRA. These amounts are in MM funds paying about $1.3% at Fidelity.

This year we did it by taking $4k / month from the Traditional IRA Jan - Sept, then taking $4k / month from the Roth IRA Oct - Dec. (We take a "bonus" withdrawal of $6k in December to pay all our withholding taxes & any other end of year expenses.)

For 2020 we will do the $36k Roth conversion on Jan. 2, then take all monthly withdrawals from the ROTH.

Withdrawals are taken on the 1st of each month, and interest is paid at the end of each month. The theoretical account balances for 2019 and 2020 are here:

Annual Int. rate =		1.3000%
Monthly Int. rate =		0.1083%
Monthly Withdrawal =		4000.00
		2019 Plan					2020 Plan
		Trad IRA		Roth IRA			Trad IRA		Roth IRA
		Balance	Interest	Balance	Interest		Balance	Interest	Balance	Interest
	Start	36000.00		18000.00					54000.00
	Jan	32000.00	34.67	18000.00	19.50				50000.00	54.17
	Feb	28034.67	30.37	18019.50	19.52				46054.17	49.89
	Mar	24065.04	26.07	18039.02	19.54				42104.06	45.61
	Apr	20091.11	21.77	18058.56	19.56				38149.67	41.33
	May	16112.87	17.46	18078.13	19.58				34191.00	37.04
	Jun	12130.33	13.14	18097.71	19.61				30228.04	32.75
	Jul	8143.47	8.82	18117.32	19.63				26260.79	28.45
	Aug	4152.29	4.50	18136.94	19.65				22289.24	24.15
	Sep	156.79	0.17	18156.59	19.67				18313.38	19.84
	Oct	156.96	0.17	14176.26	15.36				14333.22	15.53
	Nov	157.13	0.17	10191.62	11.04				10348.75	11.21
	Dec	157.30	0.17	6202.66	6.72				6359.96	6.89
	Total		157.47		209.38			0.00		366.85

The total interest earned is the same, but it accumulates entirely in the Roth instead of partially in the Traditional IRA.

Doing our withdrawals this way gets us $157.47 that is tax-free, does not increase our MAGI, and is freely spendable in our Roth. The effort required is minimal - just the Roth conversion at the beginning of the year, then taking our regular planned withdrawals from the Roth instead of the Traditional account. (Note: We are both over 59.5 years old, and our Roth IRA's are 5+ years old, so we have unrestricted access to all funds).

Has anyone else tried this? Am I missing anything in my calculation?

 

[CyclingInvestor]

This is basically what I do. Each quarter I convert all the accumulated dividends in my IRA (where almost all my $$ is) to my Roth, then spend that as needed and buy more dividend-growth stock in the Roth with the excess.

 

[RunningBum]

Seems like a good idea. Just know that you can't do this when you are faced with MRDs. The MRD has to be withdrawn. I'm pretty sure than converting and withdrawing from the Roth later will not pass. Any additional amount you wish to take out can be converted.

 

[pb4uski]

A small third order impact that may come into play, especially if one is doing estimated payments is that with the approach advocated you would have $36k of pension income when the Roth conversion is done whereas for the conventional approach you would have $4k/month of pension income.... but you could avoid any impact by making your estimated tax payment in December via 100% withholding on a tIRA withdrawal.

 

[BrianB]

you could avoid any impact by making your estimated tax payment in December via 100% withholding on a tIRA withdrawal

I checked on the Fidelity web site by starting a Roth distribution (cancelling it before submission) and found that they allow Federal and State withholding on a Roth withdrawal. You can withhold up to 99% of the total distribution, so that is why we would do an end of year "bonus" withdrawal from the Roth.

 

[BrianB]

you can't do this when you are faced with MRDs

Yes that's right, but we have 9 years until I start MRD's & 10 years for my wife.

I do realize it's a small amount but as I said in the OP, I enjoy "squeezing nickels out of c-notes". The $157 of spendable money just about offsets how much I overpaid for our last brake job (as detailed in a previous thread)!

 

[BrianB]

Each quarter I convert all the accumulated dividends in my IRA (where almost all my $$ is) to my Roth, then spend that as needed and buy more dividend-growth stock in the Roth with the excess.

We are intentionally limiting our MAGI income to just match our budget & spending so general Roth conversions are out of the question. Our marginal tax rate on excess income / Roth conversion money is:

5% State + 10% Federal + 15% ACA tax credit reduction = 30%. Ouch!

In 4 years we should be paying half that rate so we will be in a better position to do bigger Roth conversions as well as post some things in the Blow That Dough thread.

 

[Perryinva]

That’s fine as long as you have room in the bracket to do it. In which case, that’s same logic as why one does Roth conversions anyway, ie to gain as much tax free earnings as possible. Why just do a years worth? Do 3 or 5 years worth and watch those nickels compound tax free for 3 to 5 years, as long as the tax paid (especially before 2025) is the same or less.

 

[audreyh1]

How does the 5 year rule come into play? I’m fuzzy on that.

 

[Perryinva]

You have to have owned the Roth for 5 tax years and be over 59 1/2 to have unfettered access to both contributions and tax free earnings. Most people that had earned income over the last 20 years typically already beat the 5 year mark ages ago, and were simply waiting for 59 1/2.

 

[audreyh1]

But if you hadn’t owned it before now you would have to wait 5 years to start withdrawing even if older than 59 1/2.

 

[tsoispf]

Great suggestion OP. Thanks. I've added that to my financial plan. Now I just have to wait for that doggone magic 59 1/2.

 

[Gotadimple]

But if you hadn’t owned it before now you would have to wait 5 years to start withdrawing even if older than 59 1/2.

From Investopedia https://www.investopedia.com/terms/f/fiveyearrule.asp

Contributions to a Roth IRA can be distributed to the original account holder at any time. However, to withdraw earnings from your Roth without owing taxes or penalties you have to be 59½ years old and the account has to be 5 years old. Even if you’re already 59½, you have to have established and held the Roth for at least five years. That, in a nutshell, is the 5-year rule for Roths.

 

[kaneohe]

part of the kawill table that I like: makes it clear that the age of first Roth ever opened is the key metric (even if closed now). The Investopedia link uses the terms "your" and "the" Roth account which some may misinterpret to be the age of the account you are withdrawing from.

Re: Roth IRA Rules - Table Approach
Posted by: KAWill (IP Logged)
Date: October 14, 2010 11:57PM


Roth IRA Distribution Table

........................................

OVER AGE 59.5
LESS THAN FIVE YEARS SINCE OPENING FIRST ROTH IRA

Contributions: Tax-No ;Penalty-No
Conversions: Tax-No; Penalty-No
Earnings: Tax-Yes; Penalty-No

OVER AGE 59.5
FIVE YEARS OR MORE SINCE OPENING FIRST ROTH IRA

All Distributions Are Qualified (no taxes or penalties)

 

[Perryinva]

@ Audrey, no, you CAN withdraw earnings if opened after 59 1/2 and Roth is less than 5 TAX years old, but you have to pay taxes on it. After 5 years, tax free.

Nevermind, I see that kaneohe covered that.

 

[KenZ71]

I see the phrase "Age of Roth" not length of time of invested.

So does that mean a Roth opened 5 years ago can be withdrawn from regardless when the funds entered the account?

Edit: I like the expression "squeezing nickels out of c-notes" will have to borrow that one.

 

[Perryinva]

CAN be..yes, without a 10% penalty. Tax free, No, not until age 59.5.

 

[kaneohe]

I see the phrase "Age of Roth" not length of time of invested.

So does that mean a Roth opened 5 years ago can be withdrawn from regardless when the funds entered the account?

Edit: I like the expression "squeezing nickels out of c-notes" will have to borrow that one.

I'm assuming you are asking only about 1 of the 2 factors needed for a qualified withdrawal...........that you are asking if you "open" an account in Dec 2019 but don't contribute to it until Jan 2020, when does the 5 yr clock start? For the real answer, post your question in the retirement sub-forum at fairmark.com.

My guess is that it starts w/ the contribution yr: from pub 590B

"What Are Qualified Distributions?
A qualified distribution is any payment or distribution from
your Roth IRA that meets the following requirements.
1. It is made after the 5-year period beginning with the
first taxable year for which a contribution was made to
a Roth IRA set up for your benefit, and ..............................

 

[audreyh1]

From Investopedia https://www.investopedia.com/terms/f/fiveyearrule.asp

Contributions to a Roth IRA can be distributed to the original account holder at any time. However, to withdraw earnings from your Roth without owing taxes or penalties you have to be 59½ years old and the account has to be 5 years old. Even if you’re already 59½, you have to have established and held the Roth for at least five years. That, in a nutshell, is the 5-year rule for Roths.

It’s just so complicated!

 

[kaneohe]

It’s just so complicated!

it can be, esp if you have to read a ton of words.........however the kawill table reduces the problem to a directed flow chart which I find orders of magnitude easier. There are some concepts that are sometimes left out for brevity but ask if you have questions. I have developed an appreciation for what it takes to create such a chart..........your mind has to be clear and you have to know the subject. I don't and so refer to the chart often (only half of the chart is shown in this thread).

 

[Retiree_Having_Fun]

I kinda think that Roth money is best for eventual pass down to family. Looking at firecalc, their is a non-zero probability there may be money left - that will be the roth.