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Retirement Strategy
Old 03-23-2015, 09:49 PM   #1
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Retirement Strategy

Evening Everyone. Was hoping to get feedback on possible strategy as I enter further into retirement.

Reading on FIRE and other websites talk about the importance of establishing a retirement income stream. Up until now my thought was just selling some of our mutual fund shares as we need the money (and pay the taxes unfortunately).

I am focusing now more on tax impacts than I maybe should have done in the past. To be honest my focus in the past was mainly tax deductions from our 401/403 plan and not really thinking about the long term.

I am seeing my tax bracket go down or at least have more "headroom" within the bracket over the next few years due to my recent retirement. My wife and I have 401/403 of about $1M, all from pretax contributions. We will be needing to make decisions with these funds - stay, rollover, ....

What I have calculated is that (if my calculations are correct) that we can save a good amount of money by start moving our 401/403 over next few years to a Roth IRA and pay the tax now at a lower tax bracket (~ 25%) rather than wait till the RMDs kick in (~33%).

Being somewhat new to Roth IRAs my plan is to move the 401/403 funds to a dividend focus mutual fund like Vanguard Dividend Appreciation Index Fund Admiral with the intent of not reinvesting dividends (like we usually did during our accumulation phase) and using the dividends as the basis of our retirement income stream.

If we keep the funds in the Roth IRA for five years can we then use the dividends without any type of federal tax? Is this strategy even doable within the rules of Roth IRA conversions? Is there a more tax efficient way of establishing an income stream.

Thanks. As always, greatly appreciate all of the great knowledge for FIRE'ers.

Kannon
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Old 03-24-2015, 01:59 PM   #2
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Your posts asks more than one question; regarding the "income stream in retirement", see this recent thread:

Total Return Strategy vs. Income and Dividend Strategy for a Nestegg
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Old 03-24-2015, 06:36 PM   #3
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There have been a number of threads on this forum asking similar questions in the past year or so. You may want to do some searches and see what folks have said. For me, I saw the problem with my 401k and various IRA's a few years ago when I retired. I had enough tax paid cash to make it until RMD's would kick-in and was enjoying the almost zero tax bracket. However, without going into all the details again, after some calculations, I made the decision to start taking out enough each year from my IRA's to take me to the top of the 15% tax bracket before deductions. I don't know what the tax rates will be in 8 to 10 years but I doubt that they will be lower so I'm drawing down some of my pretax base now at current rates (but only to the top of the 15% bracket, before deductions). Doing that is keeping my effective tax rate well under 15%, at least until I'm 70.
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Old 03-24-2015, 06:55 PM   #4
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A common strategy here is to do Roth conversions from when you early retire to when you turn 70 and SS and RMDs start as your current tax bracket is lower than your expected tax bracket in retirement. I'm in that mode now and for the last two years have converted to the top of the 15% bracket to avoid my time in the 25% bracket later in life. You're just doing it from a different step.

And yes, the Roth money can later be withdrawn tax-free, which is one of the beauties of Roth accounts.

Moving on to income streams, I wouldn't fret too much about that, especially if expect to be in the 33% tax bracket. I think your original plan to simply sell some mutual funds is fine.... that is what I am doing.... besides your maximum tax rate on qualified dividends and long-term capital gains is 15% if you're in the 25% tax bracket, so you're saving 10%.
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Old 03-24-2015, 07:05 PM   #5
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Quote:
Originally Posted by kannon View Post
Evening Everyone. Was hoping to get feedback on possible strategy as I enter further into retirement.

Reading on FIRE and other websites talk about the importance of establishing a retirement income stream. Up until now my thought was just selling some of our mutual fund shares as we need the money (and pay the taxes unfortunately).

I am focusing now more on tax impacts than I maybe should have done in the past. To be honest my focus in the past was mainly tax deductions from our 401/403 plan and not really thinking about the long term.

I am seeing my tax bracket go down or at least have more "headroom" within the bracket over the next few years due to my recent retirement. My wife and I have 401/403 of about $1M, all from pretax contributions. We will be needing to make decisions with these funds - stay, rollover, ....

What I have calculated is that (if my calculations are correct) that we can save a good amount of money by start moving our 401/403 over next few years to a Roth IRA and pay the tax now at a lower tax bracket (~ 25%) rather than wait till the RMDs kick in (~33%).

Being somewhat new to Roth IRAs my plan is to move the 401/403 funds to a dividend focus mutual fund like Vanguard Dividend Appreciation Index Fund Admiral with the intent of not reinvesting dividends (like we usually did during our accumulation phase) and using the dividends as the basis of our retirement income stream.

If we keep the funds in the Roth IRA for five years can we then use the dividends without any type of federal tax? Is this strategy even doable within the rules of Roth IRA conversions? Is there a more tax efficient way of establishing an income stream.

Thanks. As always, greatly appreciate all of the great knowledge for FIRE'ers.

Kannon

33% bracket starts at $226851 for married filing jointly; a nice problem to have.
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