Help with how to manage WD from variety of taxable and tax deferred accounts

[chinaco]

DW and I intend to FIRE @ 55 (about 4 years). We have assets stashed in a variety of accounts that have accumulated over the years. We intend to travel during the early years. I am trying to figure out a Withdrawal strategy that minimizes taxes and generally makes the most sense.


Our accounts look like this right now



- 401ks (12%)
- Deferred Var Annuity (7%) .... I know, I know... other tax def was maxed out at the time
- IRAs (9%)
- Profit Sharing Trust (36%) retirement equivalent of pension
- Taxable Assets (MF accounts) (36%)

I am not sure how the PST is handle in terms of tax law and ER About 2/3 is tax deferred.

We also have a pension that (if taken @ 55) will cover 10% of our pre-tax income needs.

I want to consider the tax consequences when we start receiving SS in the future, RMDs later in life, etc. While I know that the tax laws are a moving target... the current state is my best guess about the future. Except... I am suspecting that the Federal Govt will increase taxes on SS later on (in other words a means based progressive tax/penalty)

I know I can take an annuitized payment from 401k, IRA, etc. until we reach 59.5. I could use our taxable assets until we reach 59.5

I am considering having the Bond/fixed parts of the investment Portfolio in tax deferred accounts for tax efficiency, however, that might cap the amount that can be withdrawn to make up the 90% gap. If I put bonds in taxable account, I will be paying out more taxes yearly.

I will need to rebalance the portfolio and draw down cash. How is occurs is a bit determined by the market. But....

• What should we do to prepare over the next few years?
• What is the most tax efficient way to get the other 90% of our income from age 55-59.5?
• Should we withdraw from taxable resources only, tax deferred only or a mix?
• Or is this something that I should break-down and hire a good tax accountant?

 

[d]

"Optimal Retirement Planner" can give some help with this http://i-orp.com/TaxCutForm.html

 

[chinaco]

VG has a link that give baisc rules.


https://flagship.vanguard.com/VGApp/hnw/planningeducation/retirement/PEdRetTapAsstsFirstContent.jsp

A write-up from TIAA-CREF

http://www.tiaa-crefinstitute.org/research/trends/docs/tr100106.pdf

 

[old woman]

I know I can take an annuitized payment from 401k, IRA, etc. until we reach 59.5. I could use our taxable assets until we reach 59.5

There is a special rule for 401K plans for people who are 55 when they leave a company to retire. Read about it in publication 590 on IRS.gov. You don't need to pay the penalties like on a IRA before 59.5.
My plan for me is to take from the 401K until I am at the top of the 15% bracket, then spend taxable accounts and last spend my ROTH. Everyone has a different situation. I don't plan to have enough income to pay tax on my SS. If I have too much I will take a bunch one year and very little in other years.

 

[chinaco]

There is a special rule for 401K plans for people who are 55 when they leave a company to retire. Read about it in publication 590 on IRS.gov. You don't need to pay the penalties like on a IRA before 59.5.

Thanks OW

 

[mh]

I know I can take an annuitized payment from 401k, IRA, etc. until we reach 59.5. I could use our taxable assets until we reach 59.5

There is a special rule for 401K plans for people who are 55 when they leave a company to retire. Read about it in publication 590 on IRS.gov. You don't need to pay the penalties like on a IRA before 59.5.
My plan for me is to take from the 401K until I am at the top of the 15% bracket, then spend taxable accounts and last spend my ROTH. Everyone has a different situation. I don't plan to have enough income to pay tax on my SS. If I have too much I will take a bunch one year and very little in other years.

I am curious as to why you are taking from the 401k. I.e. , why are you not spending your taxable account first. irregardless of 15% bracket issues. Can you enlighten me ?

 

[old woman]

I am curious as to why you are taking from the 401k. I.e. , why are you not spending your taxable account first. irregardless of 15% bracket issues. Can you enlighten me ?

I need to have some income that is taxed at full rates to use up the standard deduction and 10% brackets. If I have a mortgage my itemized deductions are about 17K right now plus personal exemption. So if I took say 10K out of my 401K my tax would be about zero. If I took from taxable my tax would be 5% on the long term gains. I get long term gains and stuff from mutual funds already so so I just as soon pay tax on the 401K money which is taxed at full tax rates than than have it grow too much and get big enough to make RMD too large. I will play with the numbers each year and decided how much I want to pay in taxes. I want to save my ROTH for times I might need large sums of money like to buy a car or new roof.
I am not rich and don't plan to become rich, my 401K has less than 100K, but I have been in the plan less than 4 years so it isn't too bad.

 

[mh]

I need to have some income that is taxed at full rates to use up the standard deduction and 10% brackets. If I have a mortgage my itemized deductions are about 17K right now plus personal exemption. So if I took say 10K out of my 401K my tax would be about zero. If I took from taxable my tax would be 5% on the long term gains. I get long term gains and stuff from mutual funds already so so I just as soon pay tax on the 401K money which is taxed at full tax rates than than have it grow too much and get big enough to make RMD too large. I will play with the numbers each year and decided how much I want to pay in taxes. I want to save my ROTH for times I might need large sums of money like to buy a car or new roof.
I am not rich and don't plan to become rich, my 401K has less than 100K, but I have been in the plan less than 4 years so it isn't too bad.

That makes sense. Thanks a bunch for the reply.

 

[Lsbcal]

I'll mention this general strategy which is the one we are pursuing:

1) You want to insure you stay in the 15% bracket if possible
2) Spend down your taxable monies first
3) Do an standard IRA (or 401k) transfer to a Roth in amounts that do not put you into the 25% bracket (you will pay taxes early but the Roth now compounds tax free). Do this transfer every year you can before you take SS
4) Defer SS until later ages while you do #3
5) When you do take SS consider a combination of IRA withdrawals, SS, and Roth to keep you in the 15% bracket

Since people have different amounts in the various buckets, have different tax structures, have different SS withdrawal preferences (and biases) it is impossible to give other then a general strategy here. For many people deferring SS will pay off in saving thousands on taxes.

Did this help a little?

Les

 

[chinaco]

Thanks for sharing your approach Les.

I have spent many years working knowledge building on the accumulation side of the equation. I am just beginning to study the draw down side of the equation.

Like everyone... I am interested in minimizing taxes.

However, I have not yet projected our tax bracket in retirement yet. I probably need to do some projections based on our tax basis for taxable accounts. Most of our taxable money is tied up in equities with LT cap gains being the tax consequence.


Can anyone recommend a good book on the subject?

 

[kaudrey]

FTR: "irregardless" is not a word. The word is regardless.

Sorry - big pet peeve of mine.

Carry on.

 

[teejayevans]

FTR: "irregardless" is not a word. The word is regardless.

Kind of, it's in the American Heritage dictionary for what it's worth:
http://www.bartleby.com/61/84/I0238400.html

 

[Lsbcal]

I don't have a book recommendation for tax planning. When I want to check out a tax strategy I'll generally run TurboTax. This will at least work for the next few years strategy. If you do not use a program like TurboTax I recommend getting something like it and installing it on your PC to at least do what-if scenarios.

Of course, tax law is constantly changing. Right now the cap gains are very low in my opinion. My guess is they will be going up in the future. Right now if you are in the 15% bracket I believe the effective cap gain rate is about 5% (15% for 25% bracket). In 2008 to 2010 I think it goes to zero for the 10-15% bracket(15% for the >15% bracket)! Others may have more details.

Les

P.S. I'm not a tax advisor and these are just a "lay" opinions.

 

[d]

Kind of, it's in the American Heritage dictionary for what it's worth:
http://www.bartleby.com/61/84/I0238400.html

well that doesn't make it correct:

Irregardless is a word that many mistakenly believe to be correct usage in formal style, when in fact it is used chiefly in nonstandard speech or casual writing. Coined in the United States in the early 20th century, it has met with a blizzard of condemnation for being an improper yoking of irrespective and regardless and for the logical absurdity of combining the negative ir– prefix and –less suffix in a single term. Although one might reasonably argue that it is no different from words with redundant affixes like debone and unravel, it has been considered a blunder for decades and will probably continue to be so.

 

[OKLibrarian]

I'm with d. Call me when it's in Webster's or OED.

 

[haha]

FTR: "irregardless" is not a word. The word is regardless.

Sorry - big pet peeve of mine.

Carry on.

Karen, it would be fun if you were to point out all grammatical errors from now on. T-Al did this for a while, but he seems to have slacked off. I sometimes want to do it myself, but I am deterred by the "Glass Houses" challenge. Regardless of my own timidity, I would enjoy seeing you assume that role. And I would get one more useful thing from this board-better grammar.

Ha

 

[HFWR]

Irregardless, I could care less...

 

[d]

I could care less...

did your mean "couldn't care less"?

 

[HFWR]

did your mean "couldn't care less"?

So much for subtlety...

 

[d]

oh.

 

[FIRE'd@51]

What amazes me is how many professional reporters and journalists misuse the word comprise.

Correct usage is "the whole comprises its parts", not "the whole is comprised of its parts"; yet the latter is what I seem to hear (or read) at least 90% of the time.

 

[haha]

What amazes me is how many professional reporters and journalists misuse the word comprise.

Correct usage is "the whole comprises its parts", not "the whole is comprised of its parts"; yet the latter is what I seem to hear (or read) at least 90% of the time.

I wonder if it is as clear as that- this is from The Merriam Webster Online Dictionary:

Main Entry: com·prise
Pronunciation: k&m-'prIz
Function: transitive verb
Inflected Form(s): com·prised; com·pris·ing
Etymology: Middle English, from Anglo-French compris, past participle of comprendre, from Latin comprehendere
1 : to include especially within a particular scope <civilization as Lenin used the term would then certainly have comprised the changes that are now associated in our minds with "developed" rather than "developing" states -- Times Literary Supplement>
2 : to be made up of <a vast installation, comprising fifty buildings -- Jane Jacobs>
3 : COMPOSE, CONSTITUTE <a misconception as to what comprises a literary generation -- William Styron> <about 8 percent of our military forces are comprised of women -- Jimmy Carter>

Although it has been in use since the late 18th century, sense 3 is still attacked as wrong. Why it has been singled out is not clear, but until comparatively recent times it was found chiefly in scientific or technical writing rather than belles lettres. Our current evidence shows a slight shift in usage: sense 3 is somewhat more frequent in recent literary use than the earlier senses. You should be aware, however, that if you use sense 3 you may be subject to criticism for doing so, and you may want to choose a safer synonym such as compose or make up.

Ha

 

[Maneiac]

What amazes me is how many professional reporters and journalists misuse the word comprise.

Correct usage is "the whole comprises its parts", not "the whole is comprised of its parts"; yet the latter is what I seem to hear (or read) at least 90% of the time.

Wait!...I know this one It is what you receive if you win a "dot com" sponsored contest

 

[Finance Dave]

My plan for me is to take from the 401K until I am at the top of the 15% bracket, then spend taxable accounts and last spend my ROTH.

This is a good approach...one I was going to recommend. Basically you are ensuring yourself a maximum 15% incremental bracket if you do this. It will work if you have enough in other "non-taxable" accounts to add on such that you can cover living expenses.

Good luck!

 

[Lsbcal]

My plan for me is to take from the 401K until I am at the top of the 15% bracket, then spend taxable accounts and last spend my ROTH.

Hmmm .... can't you convert your 401k to an IRA when you leave a company? That's what I did. Anyway then I've done IRA to Roth conversions up to the 15% bracket as mentioned above and spent the taxable accounts (don't know if one can do 401k to Roth conversions). Seems like this allows you to shelter the 401k money (assuming you pay taxes out of your taxable money) in the Roth until you really need to dip into it. Then when you reach SS and especially when minimum required distributions kick in at 70.5 you will be better able to stay in lower brackets.

Then again maybe I'm missing something about this particular situation as mentioned by "old woman".

Les