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Do withdrawal sources matter much?
Old 04-30-2016, 07:32 AM   #1
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Do withdrawal sources matter much?

I currently withdraw my yearly expenses from my taxable accounts which are all equities and plan to continue to do so until RMD time rolls around. In a bad down year I would buy an equivalent amount of equities in a IRA or 401K (TD) account account to effectively avoid selling equities in a downturn. By the time DW reaches RMD territory in 7 years our taxable accounts will be low and we will switch to exclusively pulling from TDs. Our RMDs will exceed our needs (if the market cooperates) so we will slowly start building up taxable again.

So this gets me to the question. Currently our portfolio is all equity in taxable and tilted toward bonds in TD accounts to arrive at the total AA. As we approach RMD time I plan to re-balance each TD in accordance with our AA since I will have to sell from all of them. I have read various approaches to pulling funds in such a situation. Some argue that you should sell the most appreciated assets first and then re-balance to get back to your target AA, others say sell proportionally then re-balance as needed. Still others use lifestyle funds which effectively re-balance and then sell proportionally. Has anyone studied how much difference the choice can make? Do they end up being close to a wash or is one approach better than the others?

As we approach our 80s and beyond it would be nice to move to some simple process (like a lifestyle or Wellington/Wellesey approach) with the financial institutions simply distributing the RMDs. This could be helpful if we have to turn our finances over to our kids at some point. I would like to figure this out before I can't figure it out and expect that some the engineers and spreadsheet mavens around here have already done so.
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Old 04-30-2016, 07:51 AM   #2
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I believe that withdrawal sources are important considerations. The level of importance depends on tax rates and the accumulated value of your tax deferred retirement accounts. You might want to run the "optimal retirement planner at www.i-orp.com to get a better understanding of the impact of rmd's and tax rates on the total value of your retirement, not to mention impact on healthcare subsidies through the exchanges.


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Old 04-30-2016, 08:50 AM   #3
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I believe that withdrawal sources are important considerations. The level of importance depends on tax rates and the accumulated value of your tax deferred retirement accounts. You might want to run the "optimal retirement planner at www.i-orp.com to get a better understanding of the impact of rmd's and tax rates on the total value of your retirement, not to mention impact on healthcare subsidies through the exchanges.


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All of that becomes irrelevant in 7 years. Our TD accounts will require RMDs that exceed our spending needs. Those RMDs will all be taxed as income at a high bracket (our pensions and SS are sufficient to insure that) so nothing I can do will reduce the tax rate on them. At that point, the only question is whether one approach to selling assets in the TD accounts is better from a total return perspective than another approach. I would prefer to use a simple approach (e.g. sell proportionally and then re-balance) if it doesn't make much difference for total returns.
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Old 04-30-2016, 08:57 AM   #4
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We manage are withdraw sources based on taxes and ACA subsidies and thus manage our income to gain most tax efficient withdraw looking at taxes today as well as when RMD's would kick in. I would look at in your case weather it makes sense to convert some of or most all of your taxable accounts to a Roth IRA in the years you have before RMD as Roth not subject to RMD.
In our case once we start drawing SS and other sources of taxable income when we look at RMD our tax bracket with be much higher thus we convert what we can and remain efficient.
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Old 04-30-2016, 09:32 AM   #5
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We manage are withdraw sources based on taxes and ACA subsidies and thus manage our income to gain most tax efficient withdraw looking at taxes today as well as when RMD's would kick in. I would look at in your case weather it makes sense to convert some of or most all of your taxable accounts to a Roth IRA in the years you have before RMD as Roth not subject to RMD.
In our case once we start drawing SS and other sources of taxable income when we look at RMD our tax bracket with be much higher thus we convert what we can and remain efficient.
None of this applies to us. We both have substantial pensions and DW will have SS. Roth conversions from TDs would be costly. The RMDs will be larger than our expenses. Bottom line we will have to pay a lot of tax on RMDs -- but that is just life.

My ONLY question is whether people have calculated that it is significantly more efficient to pick and choose which assets WITHIN a TD account to liquidate to generate the RMDs vs simply selling the assets proportionally.

Here is another way to look at it. Suppose for the sake of argument that all of your expenses were covered by an annuity. But you have a large 401K and have to do RMDs. Is it significantly more cost efficient to pick and choose which assets to sell in the 401K or are proportional sales close enough in efficiency that it isn't important to worry about?
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Old 04-30-2016, 09:44 AM   #6
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I think I read withdrawal the slice of what you have is better. That's why I left my husband's retirement account as is. But I sold my funds when it was all time high in my after tax account because I don't like to sell at a lost. It's human nature.


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Old 04-30-2016, 09:48 AM   #7
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My approach would be to liquidate FI first because you have a very well funded retirement and could let your AA skew more to equities. This would tend to maximize tax deferred growth in the TD accounts. But in the end your heirs will likely be the sole beneficiary of this strategy. This may of may not be acceptable to you. Also, I have a high risk tolerance and perhaps you do not? Also, paying more tax is the price of success. On balance still a good thing.
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Old 04-30-2016, 09:54 AM   #8
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We live of the maturing FI ladder so eventually will be all equities. Half of our estate goes to charities so eventually we will donate the highly appreciated stocks to avoid CGs if that exemption remains.
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Old 04-30-2016, 10:30 AM   #9
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I guess I am not expressing my question clearly. I have no question about what proportion to keep in equities or what accounts (TD vs taxable) to keep FI and equities. I just want to evaluate whether from a total return perspective when I make RMDs I need to consider whether to selectively pick sources or just proportionally liquidate.

Lets try another thought experiment. You have a $1,000,000 IRA with a 50/50 AA in VG total bonds and VG total stock indexes. You will need to do ~ $30,000 RMDs this coming year. Is it roughly a wash to let the financial institution make monthly 50/50 distributions from stocks and bonds with you doing periodic re-balances if needed or should you spend time evaluating market performance and picking which assets to tap at the end of the year?
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Old 04-30-2016, 10:32 AM   #10
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My ONLY question is whether people have calculated that it is significantly more efficient to pick and choose which assets WITHIN a TD account to liquidate to generate the RMDs vs simply selling the assets proportionally.
The bucket method folks have studied this and to my knowledge say selling the most overpriced asset (compared to long term average) yields the best return. So, yes, according to that it is more efficient to liquidate selected assets. FWIW, that's my approach.
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Old 04-30-2016, 10:40 AM   #11
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The bucket method folks have studied this and to my knowledge say selling the most overpriced asset (compared to long term average) yields the best return. So, yes, according to that it is more efficient to liquidate selected assets. FWIW, that's my approach.
Yes, that is what I am evaluating. That is the DIY vs Lifestyle fund consideration in a nutshell.

I'm curious about whether people think the DIY advantage is sufficiently large that it becomes worth our while to keep doing it into our 80s and beyond. Or whether the difference is small enough that it is not much of an issue letting the financial institution calculate your RMDs and send monthly checks. The later would be easy and less of a burden on aging minds but does it likely leave a lot of money on the table or just a little?
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Old 04-30-2016, 10:42 AM   #12
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I'm not sure why you purposefully withdraw from taxable account, and not tax sheltered account.
Unless you are already at the top tax rate, if you can take out 50K per year from IRA and pay 5% less tax than when mandated RMD's come around, why not save the 1K in tax, (and the flexibility of having largely non-taxable money in taxable account available) ?

As to your question, I think GrayHare answered it.
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Old 04-30-2016, 11:12 AM   #13
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All of that becomes irrelevant in 7 years. Our TD accounts will require RMDs that exceed our spending needs. Those RMDs will all be taxed as income at a high bracket (our pensions and SS are sufficient to insure that) so nothing I can do will reduce the tax rate on them.
Completely untrue if you ignore charity. If you don't need the RMD money, donate it with QCDs to satisfy them tax-free.
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Old 04-30-2016, 11:26 AM   #14
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I'm not sure why you purposefully withdraw from taxable account, and not tax sheltered account.
Unless you are already at the top tax rate, if you can take out 50K per year from IRA and pay 5% less tax than when mandated RMD's come around, why not save the 1K in tax, (and the flexibility of having largely non-taxable money in taxable account available) ?
I am pulling from the taxable accounts while I can because we are in the top bracket and 15% on the gains is a lot less than the income rate on withdrawals from the TDs.

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Completely untrue if you ignore charity. If you don't need the RMD money, donate it with QCDs to satisfy them tax-free.
I do and will give some to charity and take the deduction. I will need most of the RMD money and will invest the remainder in taxable (equities) for my estate. The bottom line is you have to get money out of TD accounts sooner or later and the question I am trying to address is whether I should figure on doing the work to figure out which assets within the TDs to liquidate in any given year or go with a simpler proportional approach.
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Old 04-30-2016, 11:48 AM   #15
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The later would be easy and less of a burden on aging minds but does it likely leave a lot of money on the table or just a little?
I've not seen that specific aspect studied to that level of detail, rather only as part of a larger bucket strategy, so as to how much dollar/percentage difference that part makes I do not know. Morningstar had/has a good video about the strategy, with lots of analysis and numbers, though not the detail about which you are curious. It was one of the Christine Benz videos I think, can't find the link at the moment.

I plan to liquidate the most overpriced assets while I'm mentally capable of easily identifying them. If/when that becomes a struggle I'll shift to a proportional withdrawal approach, assuming I can handle even that much.
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Old 04-30-2016, 11:52 AM   #16
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Sounds like you are in the same boat as me. Roth conversions would not help appreciably because I am already in the 25% bracket and will be for the rest of my life due to pension and SS. I withdraw about 2% from my 401k each year. The 401k takes a percentage from each fund I have in the account for distribution. After that, I rebalance. There are no fees for withdrawing or moving money between funds so I don't see a difference in withdrawal strategy. I don't have investment funds outside TD accounts. The only change when I reach 70 is that I will no longer withdraw funds from the accounts for living expenses. At that time my income streams will be enough for living expenses. I plan to use QCDs for a few years and may continue that into the future, but will at some point need to move tax deferred to taxable. For me, I can't see a reasonable benefit to try to eek out a few more dollars to go through a complex analysis and withdrawal process.
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Old 04-30-2016, 11:59 AM   #17
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The bottom line is you have to get money out of TD accounts sooner or later and the question I am trying to address is whether I should figure on doing the work to figure out which assets within the TDs to liquidate in any given year or go with a simpler proportional approach.
Further withdrawal study results from Darrow Kirkpatrick of Can I Retire Yet?
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Old 04-30-2016, 12:01 PM   #18
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I just want to evaluate whether from a total return perspective when I make RMDs I need to consider whether to selectively pick sources or just proportionally liquidate.
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Yes, that is what I am evaluating. That is the DIY vs Lifestyle fund consideration in a nutshell.

I'm curious about whether people think the DIY advantage is sufficiently large that it becomes worth our while to keep doing it into our 80s and beyond. Or whether the difference is small enough that it is not much of an issue letting the financial institution calculate your RMDs and send monthly checks. The later would be easy and less of a burden on aging minds but does it likely leave a lot of money on the table or just a little?
If you are picking and choosing what to liquidate for your RMD's, isn't that pretty similar to market timing? It seems so to me, and I'm TERRIBLE at market timing. So my opinion is to avoid picking and choosing sources for RMD withdrawals.

In my case, the dilemma we are discussing turns out to be pretty easily resolved because my TSP is all in "G Fund" with equal monthly withdrawals. So, when RMD time comes (in 2018 IIRC), if my equal monthly withdrawals aren't sufficient for RMD requirements then the TSP will just liquidate more G fund for me. According to my computations they probably won't have to do it but I am happy knowing that they have my back.
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Old 04-30-2016, 12:09 PM   #19
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Sounds like you are in the same boat as me. Roth conversions would not help appreciably because I am already in the 25% bracket and will be for the rest of my life due to pension and SS. I withdraw about 2% from my 401k each year. The 401k takes a percentage from each fund I have in the account for distribution. After that, I rebalance. There are no fees for withdrawing or moving money between funds so I don't see a difference in withdrawal strategy. I don't have investment funds outside TD accounts. The only change when I reach 70 is that I will no longer withdraw funds from the accounts for living expenses. At that time my income streams will be enough for living expenses. I plan to use QCDs for a few years and may continue that into the future, but will at some point need to move tax deferred to taxable. For me, I can't see a reasonable benefit to try to eek out a few more dollars to go through a complex analysis and withdrawal process.
+1, same conclusion I've come to when I've analyzed our situation. Roth conversions are roughly a wash tax wise for us, so I haven't done any. Between RMD and the Soc Sec tax torpedo, we've concluded drawing from both taxable and deferred such that AA is maintained is more likely to maximize income/minimize taxes as any lopsided approach.

But if someone has convincing evidence to the contrary for folks who can't stay under the 15% bracket also facing RMD/Soc Sec income exceeding spending - I am most interested in reading since we're 61 and 59 respectively. Sure would be nice to know with more certainty before we're 70...
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Old 04-30-2016, 12:31 PM   #20
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If you are picking and choosing what to liquidate for your RMD's, isn't that pretty similar to market timing? It seems so to me, and I'm TERRIBLE at market timing. So my opinion is to avoid picking and choosing sources for RMD withdrawals.
I suppose it is market timing to a degree but the standard withdrawal advice is to sell your appreciated assets and then re-balance to get back to your AA. So, in a big up year in equities, you would sell equities for your withdrawal and then re-balance. In a bear, you would tap bonds and re-balance. That is what I do know. But with several TD accounts in old age trying to figure out which funds to tap could get daunting. So, like Hermit and some of the others, I will probably simplify things be setting a simple AA in each account and letting the financial institutions calculate RMDs and liquidate proportionally, maybe even go to monthly distributions to checking. DW would like something simple like that if I kick the bucket and the kids would probably prefer that if we ask them to handle stuff for us.
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