High 401K Balance, RMD's and Withdrawal Strategies

[karen1972]

With taxable accounts, I'm never sure how much of that is really taxable for most people as I sit with 50% of my taxable account as profit. I've prioritized taking the profits out in the zero % tax bracket.

Once most of that is now already taxed, then I can worry about RMDs and conversions. Ill just be glad when I don't have to worry about what I can trade in my taxable without thinking about taxes and ACA subsidies each time I want to do a large trade. If I was just trading without those considerations, I would have sold all my Boeing when it dropped the first 10%, instead I limited my sale up to the bracket and now sitting here annoyed.

 

[RunningBum]

With taxable accounts, I'm never sure how much of that is really taxable for most people as I sit with 50% of my taxable account as profit. I've prioritized taking the profits out in the zero % tax bracket.

Once most of that is now already taxed, then I can worry about RMDs and conversions. Ill just be glad when I don't have to worry about what I can trade in my taxable without thinking about taxes and ACA subsidies each time I want to do a large trade. If I was just trading without those considerations, I would have sold all my Boeing when it dropped the first 10%, instead I limited my sale up to the bracket and now sitting here annoyed.

It's a trade off for sure, to decide whether to take 0% LTCG vs perhaps a 10% tax rate saving on a conversion vs perhaps an ACA subsidy. One factor that has me holding off on the 0% LTCG is that my heirs get a step up basis on that. So then there's the question of whether you think you'll need all of your funds vs. leaving appreciated taxable funds behind. And of course that step up basis could go away.

 

[pb4uski]

I have run some numbers, and I have concluded that a married couple who has a post-retirement annual income of $100,000 in 2019 will find that their total tax burden (Federal taxes paid divided by income) is roughly 9%, and that is without any consideration of the portion of social security benefits that are tax-free or the favorable rates applied to dividends and capital gains. If you double the figure to $200,000, the tax burden is about 15%. Both rates are entirely unobjectionable, in my view. At these levels, I believe that there is not much to be gained by trying to adjust between taxable and tax-deferred accounts when trying to prepare for life after age 70. The caveat is that we cannot guarantee that the current tax rates will not be increased in the next 5-10 years.

I agree. The benefit of early Roth conversions only comes into play when the looming RMD's are large: beyond, say, $300,000- $400,000 per year. By paying taxes in one's 60's via Roth conversions, the benefit could be substantial. Yet it is beneficial only to a small group of people, those with multi-million dollar pre-tax savings. With 401K's now a key savings vehicle, this might affect an increasing number of early retirees in the future.

I disagree with the bolded (mine) above. For example, we're currently in the 22% federal tax bracket for MFJ. My current projections show that when my husband retires, we'll drop to the 12% tax bracket. When we start SS, 85% will be taxable. RMDs (on a bit less than a multi-million $ pre-tax balance) will range from around $40K to $80K through age 90, increasing each year. Our tax bracket will go back to 22% through our late 70s, then go up to 24%.

If I tweak it so that more of our investment income is more tax-advantaged or tax-exempt, rather than taxable at ordinary income rates, the benefit would become even greater. I could drop us into the 0% bracket.

I suspect others feel the same way, due to the many questions on this topic.

+1 with you gwraigty

I've converted over $322k over the last 6 years (post ER so no work earnings but before SS income starts) and paid $26k in tax (8.1%). Since I will be solidly in the 22% tax bracket once SS starts.... on that $322k of conversions I have saved $45k compared to if I had not done those conversions and waited.... so I believe that there is much to be gained by trying to adjust between taxable, tax-deferred and tax-free accounts before RMDs start.

 

[gwraigty]

+1 with you gwraigty

I've converted over $322k over the last 6 years (post ER so no work earnings but before SS income starts) and paid $26k in tax (8.1%). Since I will be solidly in the 22% tax bracket once SS starts.... on that $322k of conversions I have saved $45k compared to if I had not done those conversions and waited.... so I believe that there is much to be gained by trying to adjust between taxable, tax-deferred and tax-free accounts before RMDs start.

Awesome!

 

[2177V]

I married a beautiful woman 20 years younger than me and this reduces my RMD because the RMD is dependent of the age of both myself and my wife.

What is humorous is that the IRS has a RMD table for a husband that is 99 years old with a 20 years wife.

 

[pb4uski]

I wasn't aware that your spouse's age impacted RMDs, but I see it now.

So what I really need now is a much younger spouse.... I'll have to talk to DW about that when she gets home.

 

[orplanner]

I wasn't aware that your spouse's age impacted RMDs, but I see it now.

So what I really need now is a much younger spouse.... I'll have to talk to DW about that when she gets home.

Spousal age is not a parameter that you change to do sensitivity analysis on your retirement calculator's plan.

 

[2177V]

100% treasuries

FYI. I had a strategic plan to buy real estate in Hawaii using my IRA but I can only withdraw a certain amount per year to avoid paying too much taxes.

The Dow made little progress since January 2018 but I should make 1% to 2% per year with 100% treasuries. To my surprise, I made 1.5% in a single month because 1 purchased treasuries when the interest rates were relatively higher and there is now a "flight to quality" in the bond market.

Here is example of Vanguard treasuries performance during a bear market: The numbers below can be verified by https://investor.vanguard.com/mutual-funds/profile/VFITX

VFIRX returns during 2007, 2008, 2009 were 8.02%, 6.78%, 1.54%
VFITX returns during 2007, 2008, 2009 were 9.98%, 13.32%, -1.69% (loss)
VFIRX latest quarterly returns: 1st and 2nd qtr 2019 are 1.09% and 1.54%
VFITX latest quarterly returns: 1st and 2nd qty 2019 are 2.1% and 3.04%

I am happy with 100% treasuries in my IRA in these uncertain times because my treasuries will not decline during a crash or a bear market. In fact, the value of treasuries should rise during a crash or bear market. See "VFITX" orange graph in https://obliviousinvestor.com/what-happens-to-bonds-in-a-stock-market-crash/

I only lose if the US goes bankrupt....or the bull market continues and exceeds the 2007 returns (pre-bear market) "flight to quality" returns of 8.02% and 9.98% as noted above. If the stock market crashes, I should make a killing because I intend to buy stock at bargain prices using my treasuries.

In a bull market, everyone makes money. However, in a bear market, only a few investors knows how to make money. These few investors fully understand the value of an "asset preservation strategy" when the business cycle suggests the economy is reaching the top of the curve. Yes this is market timing and most publications will state that market timing is wrong. However, I do it anyway.....but I do it in such a way that the downside risk is minimal and acceptable to me alone.

 

[pb4uski]

....I should make 1% to 2% per year with 100% treasuries. .... I only lose if the US goes bankrupt...

Don't you also lose if inflation is more than 1% to 2% per year?

 

[2177V]

I can handle "minor" losses due to inflation. I can't handle "large" losses during a crash or bear market.



Note the performances of treasuries in 2009 are either small or negative. This is because money is flowing from treasuries back to stock.



I should be in 100% treasuries for only 1 to 3 years which is a short term. Afterwards....I should be back to stock again but only after the bear market is over and we are back to a bull market business cycle phase.



I took Econ 1A and 1B at UC Berkeley in 1973 and I was taught that market crashes do occur BEFORE an economic downturn. This is because people panic at the same time when they realize they are losing big money. I am avoiding that situation.

 

[RunningBum]

vchan, for how long have you been out of equities?

 

[pb4uski]

.... I can't handle "large" losses during a crash or bear market. ....

Got ya. I can handle large losses from a bear market... since I stay invested those large losses are transitory.... I'm not confident if I got out on knowing when the best time to get back in is.

Even if I define it as when I got out then it is just an illusion... if I got out I would avoid the transitory loss and have interest.... if I stay in I'll avoid the transitory loss and receive dividends... other than psychologically not a lot of difference to me and I'm an experienced enough investor that I can stomach the downs and ups.

 

[2177V]

Here is another graph that is useful to explain why I am bearish. The grey area represents recessions and the blue line represents the fed rates.

Point number 1: The grey area of recessions is a short duration which is why I do not fear inflation. This is because the duration of my 100% treasuries portfolio will also be short.

Point number 2: The recession occurs after the fed cuts rates. Note the pattern: The fed raise rates. The economy slows. The fed lowers rates. The recession hits. IMO, the fed tighten the interest rates too much too fast recently and now the economy is slowing down. For example: Housing starts are slowing down.

Point number 3: Note the spacing between recessions. Typical business cycle as taught in the colleges. Studying the macroeconomics of the business cycle at UC Berkeley is something I cannot ignore.



I am hoping the next recession will be mild and short so that we can be in the white zone again...when the economy is expanding and everybody is making money for their retirement.

 

[2177V]

Got ya. I can handle large losses from a bear market... since I stay invested those large losses are transitory.... I'm not confident if I got out on knowing when the best time to get back in is.

Even if I define it as when I got out then it is just an illusion... if I got out I would avoid the transitory loss and have interest.... if I stay in I'll avoid the transitory loss and receive dividends... other than psychologically not a lot of difference to me and I'm an experienced enough investor that I can stomach the downs and ups.

The problem I have is my time horizon is different. I need the money now to buy real estate. Everybody's time horizons are different and therefore their strategies are different. If the bear market last 3 to 4 years and they need the money in 2 years, then they are screwed if their portfolio does not have investments in safe bonds or cash.

 

[2177V]

vchan, for how long have you been out of equities?

After I realized that the DOW made almost nothing since January 2018. I sold all my stock holdings and got into 100% treasuries about 1 to 2 months ago,

 

[pb4uski]

After I realized that the DOW made almost nothing since January 2018. I sold all my stock holdings and got into 100% treasuries about 1 to 2 months ago,

Are you incuding dividends? It looks to me like stocks returned 3-4% from Jan 2018 to May 2019.... not great most than "almost nothing".

https://www.portfoliovisualizer.com...ation3_3=100&total1=100&total2=100&total3=100

 

[2177V]

Are you incuding dividends? It looks to me like stocks returned 3-4% from Jan 2018 to May 2019.... not great most than "almost nothing".

You are correct. DOW was 26,149 on 1 Jan 2018 and today, it is 25,886 but I did not include dividends. However, IMO if this was a bull market we should have broken 28,000 and there were 3 attempts to reach 28,000 but it fell back each time. This suggests weaknesses.

What alarms me the most is Europe. European countries reduced interest rates to zero and even negative. However, you would expect this will stimulate their economy. It hasn't.

Now the European governments are thinking about spending more government money to stimulate their economy and go heavily into debt. If this plan does NOT work, we will have a global recession because the Europeans cannot buy American goods which will slow us down. Add the fact that we have tariffs on China and China is already not buying American goods then this begs the question: Who will buy American goods?

"Uncertainty" will cause US businesses to hesitate in expanding their business or hire more people. Housing starts are slowing as demonstrated in the following link: https://tradingeconomics.com/united-states/housing-starts

There can be a snowball effect and this explains the business cycle.

All of these factors convinced me to go 100% treasuries. There is nothing wrong in going into an "asset preservation mode" in times of uncertainty.

 

[SnowballCamper]

At what age does spending less now, in order to have more later stop making sense?

Getting back to the OPs question:

I spent much of today exploring i-ORP, thinking about IRA conversions and withdrawal strategy.

My big take away is that the optimal strategy of doing multiple conversions is only marginally better in the long run. We get 90k disposable income with no conversions, and 92k with 11 conversions in the optimal case. In order to get that additional 2k a year we would pay ~210k in taxes over the first 6 years.

Figure 3 at the bottom of page 52 in an article by the ORP author makes this graphically clear:
https://www.i-orp.com/modeldescripti...e1.pdf#page=49

So for me, I'll skip the IRA conversions, and have a much more reasonable tax bill for now. Psychologically it's much more comfortable to avoid the tax bill now, especially with there is uncertainty about the future tax policy. My thinking is also that I'm more likely to have deductible medical expenses later in life to offset any high RMD income. But we also paid off the mortgage, when the numbers say we should have stayed invested. Yet we're very pleased with no mortgage.

 

[2177V]

Getting back to the OPs question:

I spent much of today exploring i-ORP, thinking about IRA conversions and withdrawal strategy.

My big take away is that the optimal strategy of doing multiple conversions is only marginally better in the long run. We get 90k disposable income with no conversions, and 92k with 11 conversions in the optimal case. In order to get that additional 2k a year we would pay ~210k in taxes over the first 6 years.

Figure 3 at the bottom of page 52 in an article by the ORP author makes this graphically clear:
https://www.i-orp.com/modeldescripti...e1.pdf#page=49

So for me, I'll skip the IRA conversions, and have a much more reasonable tax bill for now. Psychologically it's much more comfortable to avoid the tax bill now, especially with there is uncertainty about the future tax policy. My thinking is also that I'm more likely to have deductible medical expenses later in life to offset any high RMD income. But we also paid off the mortgage, when the numbers say we should have stayed invested. Yet we're very pleased with no mortgage.

My two cents...our debt is now $22 trillion dollars. Is our federal taxes likely going up or likely going down?

It may depend how old you are. In my case, I am hoping I will be dead before they increase my taxes to pay down the national debt.

My other concern is the government print money which causes inflation. This has happened when government expeditures exceed government taxes. Government bonds tied to inflation may be useful.

 

[Al18]

I checked the value of Fidelity SP500 Index fund FXAIX and the value in my IRA increased 13.7% between 1/1/18 and 7/30/19.

 

[RunningBum]

I married a beautiful woman 20 years younger than me and this reduces my RMD because the RMD is dependent of the age of both myself and my wife.

I wasn't aware that your spouse's age impacted RMDs

I wasn't aware that your spouse's beauty impacted RMDs.

 

[RunningBum]

After I realized that the DOW made almost nothing since January 2018. I sold all my stock holdings and got into 100% treasuries about 1 to 2 months ago,

OK, so you are market timing. It does seem like a pretty good time for that, but there have been a lot of times during this bull market when I'd have said that. I hope it doesn't work out too well for you.

 

[2177V]

OK, so you are market timing. It does seem like a pretty good time for that, but there have been a lot of times during this bull market when I'd have said that. I hope it doesn't work out too well for you.

You can call it "market timing". I call it "asset preservation" because I have observed too many signs in Europe and too many signs in the USA that everything is slowing down. Market crashes do occur BEFORE an economic downturn. Investment is based on "greed" versus "fear". I am now in the latter camp. I want to preserve what I have earned during the previous 10 years bull market. In my case, I cannot afford to wait the 4 to 6 years for the market to recover from a bear market. I am an older retiree and I may be dead by then.

 

[teejayevans]

I plan on minimum withdrawals during good times, and large withdrawals during bad. When the market comes back, the capital gains will get preferred tax treatment as oppose to IRA withdrawals, making up for additional tax because of higher income, reducing taxes later.