Does it matter which buckets to take SWR from?

[dtbach]

The buckets I'm talking about are normal investments (non-IRA), Trad IRA and ROTH IRA.

Right now I have a 3.4% WR but take all of that from investments and Trad IRA. And within those buckets, I'm taking about 7.8% from Trad IRA's and about 1.7% from normal investments. I figure that pulling more money now from the IRA's will lower my RMD's and also leave the kids more money in the ROTH IRA's.

Or in the long term does it really not make much of a difference? Maybe I'm even doing things backwards??

 

[gauss]

Some questions that may help to provide a path:

- Are you currently married filing jointly?

- Are you planning to leave a large bequest to charity?

- Do you see your marginal tax rate changing in the future?

-gauss

 

[The Cosmic Avenger]

I'm curious, too, dtbach! I probably have a few more years until I have to worry about WR and its composition, but I'd heard the same thing, that if you want to leave money to your heirs, the Roth IRA is the most tax-advantaged account for them to inherit.

Then again, I inherited a regular IRA from each of my parents, and now all our charitable giving (which I always do in December for repeat yearly giving) is funded by my RMD from the inherited IRAs. It's a nice supplement.

 

[OldShooter]

What we did, but a long time ago and I don't remember all the numbers:

I withdrew from my taxable IRAs and put 100% of the money into a Roth, then paid the taxes due from the normal taxable account. Continued this until the normal taxable funds were gone. Now we live of what is left in the TIRAs (quite a bit actually) and let the Roth $ accumulate. At the time we did it there were serious estate benefits from bequeathing Roth $ instead of IRA $. Your CPA should be able to tell you whether a strategy like this is still a good idea and should also be able to comment on the question in your OP.

 

[bingybear]

The buckets I'm talking about are normal investments (non-IRA), Trad IRA and ROTH IRA.

Right now I have a 3.4% WR but take all of that from investments and Trad IRA. And within those buckets, I'm taking about 7.8% from Trad IRA's and about 1.7% from normal investments. I figure that pulling more money now from the IRA's will lower my RMD's and also leave the kids more money in the ROTH IRA's.

Or in the long term does it really not make much of a difference? Maybe I'm even doing things backwards??

which buckets (your definition) - it matters from the stand point of how it fits your overall plan. Taking $ at RMD time kind of requires you to take from TIRA/T401ks. At least the RMD amount. What is best to do really depends on your complete status. For me I try to live of my taxable accounts and convert TIRAs into roths. This makes sense for me. at this point.

In general it depends on your situation and goals. I'm not sure this is a one size fits all.

Now if you pull all the $ from a single investment, then you might want to keep an eye on your AA as it may creep with the repetitive withdraws.

 

[walkinwood]

It depends on what your marginal tax rate is now (doing what you're doing) and what you think it will be when RMDs hit.


Almost all advice I've read suggests that ROTH IRAs stay untouched till the end. You could of course use them strategically to stay within a certain taxable income limit.


Asset location is important too. Income producing assets first into Traditional IRAs. Securities (assuming that they're the asset with the most appreciation potential) first into a ROTH.


So much depends on your tax situation. I haven't found a useful calculator for taxes into the future though ESPlanner came close.

 

[sengsational]

I usually mention i-orp as one data point in charting a course through these waters, since RMD's are a kind of partially visible obstacle, and those are considered in the analysis. And presuming you rebalance to an asset allocation target, set the expected return for all tax buckets to the same value, or it will skew the results of which to pull from first.

 

[Fedup]

I use my taxable bucket to pay tax on my Roth conversion. So most likely when that goes I might have to use the RMDs of tIRA next. Then Roth IRA last.

 

[HI Bill]

Without knowing your age (relevant to RMDs), you investment values, your tax situation, your marital situation, AND how your investments are made within your 'buckets', this is nearly impossible to answer. For ME, the answer is to keep my taxes as low as possible for as long as possible, while taking distributions from tax-sheltered accounts, with the aim of having lower RMDs when SS kicks in to minimize taxes.

I have a year-by year spreadsheet where I forecast taxes from my age 53 to 106 (my wife is younger than I). Tax rules may change, and of course, the performance of your investments may influence which bucket you withdraw from. I'm not sure that your investments are in buckets, by the traditional definition.

 

[dtbach]

Some questions that may help to provide a path:

- Are you currently married filing jointly?

Yes

- Are you planning to leave a large bequest to charity?

No

- Do you see your marginal tax rate changing in the future?

Most likely going up


-gauss

Both DW and I are in our mid 60's. Not sure if it's worth it at this time to sell Trad IRA's, pay the taxes and then invest in ROTH IRA's. Have played with tax strategies, but frankly it doesn't seem worth the effort. Main idea is to leave most of the estate within the ROTH IRA's even if that means paying more taxes on the other income.

 

[pb4uski]

Whether or not Roth conversions make sense all depends on your tax bracket today vs in the future. For example, we are both 63 this year and before Roth conversions our income is mostly my pension, a little interest income and dividends and capital gains. Our ordinary income... my pension and the interest... is well below the $24k standard deduction for a couple. Once we start SS and RMDs, our ordinary income will be well into the 22% tax bracket.

So any Roth conversions that we do today will ultimately be taxed at 22%, so I convert to the top of the 12% tax bracket and usually pay 7-10% of the converted amount in federal income taxes... saving 12-15% of the amounts converted. As an added bonus, investment results on the amounts converted are tax-free for my life and to our heirs.

Over the past 6 years, we've converted ~$285k, paid $22k (7.6%) in federal tax and saved about $41k in federal tax.

So we are currently living on taxable account funds and using taxable account funds to pay taxes on Roth conversions, next we will tap tax-deferred tIRAs and leave the Roths until last... most likely, they will just continue to grow tax free and be inherited by our kids.

We currently pay ~3+% in state income tax. Once we are on Medicare at 65 we may move to a no tax state.... in which case we may supercharge our Roth conversions for a few years into the 22% tax bracket.

 

[RunningBum]

Right now I have a 3.4% WR but take all of that from investments and Trad IRA. And within those buckets, I'm taking about 7.8% from Trad IRA's and about 1.7% from normal investments.

I don't follow that you have a 3.4%WR but are taking 7.8+1.7% = 9.5%??

If you're taking extra from the trad IRAs (more than you'll spend), then I would definitely convert it to a Roth rather than leave it in taxable. There may be a special case or two why you might not do this, like if you thought you'd need that money soon and don't have the 5 year window satisfied, but it doesn't seem like they'd apply.

 

[bingybear]

I don't follow that you have a 3.4%WR but are taking 7.8+1.7% = 9.5%??

If you're taking extra from the trad IRAs (more than you'll spend), then I would definitely convert it to a Roth rather than leave it in taxable. There may be a special case or two why you might not do this, like if you thought you'd need that money soon and don't have the 5 year window satisfied, but it doesn't seem like they'd apply.

The op has a 3.4% WR from his total investments. His TIRA is not all his investments. He takes part of his withdraw from the TIRA that equals 7.8% of the TRA and 1.7% of his a taxable investments..

This is 7.8% of TIRA+1.7% of taxable = 3.4% of (taxable, TIRA, Roth, Real Estate, and whatever else he has).

 

[RunningBum]

ok, that makes sense, thanks bingy.

Not much info to go on, as you and gauss have asked for.

My own plan is to spend from taxable and try to totally convert the tIRA to Roth, to maximize the amount in the Roth. I have plenty in taxable for that. If the OP does not, that plan may not work.

 

[bingybear]

ok, that makes sense, thanks bingy.

Not much info to go on, as you and gauss have asked for.

My own plan is to spend from taxable and try to totally convert the tIRA to Roth, to maximize the amount in the Roth. I have plenty in taxable for that. If the OP does not, that plan may not work.

Sounds like we are in similar situations. I expect to accelerate roth conversions too.

It is so dependent on what assets people have and what they need to do with their assets.

 

[Hermit]

Very different situations. I am forever in the 22% range due to pension and SS from the late DW's account. All my savings are in Traditional IRAs. Converting to Roths now does not make much difference and the untaxed assets continue to grow. RMDs start in a couple of years. I will pay the piker, but I will be comfortable while doing so.

 

[bingybear]

Very different situations. I am forever in the 22% range due to pension and SS from the late DW's account. All my savings are in Traditional IRAs. Converting to Roths now does not make much difference and the untaxed assets continue to grow. RMDs start in a couple of years. I will pay the piker, but I will be comfortable while doing so.

We won't have pensions and are too young for SS. This is our opportunity. The last few years I have not done enough in conversions. If I wait too long, then my opportunity will be gone.

If it was 10 years ago you may have been able to do conversions.. or maybe not.

If the OP will give up a little more info then we may be able to make more informed comments.

 

[gauss]

Both DW and I are in our mid 60's. Not sure if it's worth it at this time to sell Trad IRA's, pay the taxes and then invest in ROTH IRA's. Have played with tax strategies, but frankly it doesn't seem worth the effort. Main idea is to leave most of the estate within the ROTH IRA's even if that means paying more taxes on the other income.

Following up on my 3 questions it sounds like:

#1) You are married currently filing jointly

#2) You have no plans to bequest a large amount to charity.

#3) Your tax rate is not changing significantly between now and later.


With these assumptions, the rational thing to do now would be, IMHO, to start converting from the TIRA to the Roth IRA (or drawing down the TIRA which you are indeed already doing). The reason is that if your spouse or you should pass away, then you will find yourself filing as a single person and then any RMDs or Roth conversions as a single person may be at a much larger tax rate. This was definitely the case for us prior to the new tax law.

In our case, we plan to bequest a significant amount to charity so this, on the other hand, motivates us Not to convert because the proceeds in the TIRA that have a charity as a beneficiary will never be taxed (at least under current law).

As such I plan to get to about 1/3 TIRA 2/3 Roth IRA split by the time I begin RMDS. This is a reasonable balance between the competing objectives that apply in my situation. In our situation I suspect our marginal tax rate will remain constant.

-gauss

 

[dtbach]

Very different situations. I am forever in the 22% range due to pension and SS from the late DW's account. All my savings are in Traditional IRAs. Converting to Roths now does not make much difference and the untaxed assets continue to grow. RMDs start in a couple of years. I will pay the piker, but I will be comfortable while doing so.

This is pretty much my situation, although my trad vs Roth ratio is 70/30. My thought is to drain the Trad and let the Roth grow before RMD kicks in.

 

[Hermit]

....
In our case, we plan to bequest a significant amount to charity so this, on the other hand, motivates us Not to convert because the proceeds in the TIRA that have a charity as a beneficiary will never be taxed (at least under current law).
.....
-gauss

This is pretty much my situation, although my trad vs Roth ratio is 70/30. My thought is to drain the Trad and let the Roth grow before RMD kicks in.

I am planning on doing charities for the first ~10 years of RMD. After that, it will be scaled back to a percentage of RMD. The idea is to move a portion of my estate designated to charity in the form of QCDs over that 10 year period and then maintain the percentage with smaller QCDs after that.

If you have no intention to leave part of your estate to charity (a very personal decision), are getting close to RMDs, and have a high income, I think it may be best to continue to use as need be and grow your traditional IRA and then pay the taxes at RMD time. That seemed to be the consensus of the retirement tools when I looked at this area in detail several years ago.

 

[Jerry1]

Remember that in 2025 the brackets revert back. So, if you’re going to be put in the heigher brackets due to RMD’s, might want to convert more now to a ROTH. As has been said, it’s an individual thing but to me, RMD’s played a large role. I thought I’d ride the lower tax bracket, but then realized that at 70, I’d be forced into the height bracket. So I’m going to get as much out at the lower bracket and even some at the higher bracket while it’s still 22%.

 

[RunningBum]

If you have no intention to leave part of your estate to charity (a very personal decision), are getting close to RMDs, and have a high income, I think it may be best to continue to use as need be and grow your traditional IRA and then pay the taxes at RMD time. That seemed to be the consensus of the retirement tools when I looked at this area in detail several years ago.

It's gotta be dependent on your current and projected tax rates. There's no way a tool should be giving any blanket statement without that info. Maybe it was the consensus for your data but that doesn't mean it automatically applies to everyone else.

 

[OldShooter]

It's gotta be dependent on your current and projected tax rates. ...

Exactly. But the "projected" is just a sort of roulette game that the federal government runs. The tax bill just passed by the House has, from what I have read, changed the "projected" tax rates again and (happily) reduced the RMD requirements. I don't know where the Senate is, but this might be something that they want to pass before the mid-terms. Just guessing on that, though.

 

[pb4uski]

Remember that in 2025 the brackets revert back. ....

To be fair though while the new lower tax rates are scheduled to revert back in 2025 to keep the bill that was passed where it could not be fillibustered, the crafters of the bill said that they intend to make them permanent when/if they get the opportunity to do so.

 

[dtbach]

Thanks for all replies. It appears that what I am doing is at least so-so OK. I'm not going to spend hours trying to figure out a tax strategy that may be great or horrid depending on what the future tax laws are. Bottom line for me is that I'm retaining most of my capital in investments and Roth IRA's, and reducing my Trad IRA's before I have to start taking RMD's.