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Roth vs. Trad. IRA - Which to withdraw from first.
Old 10-09-2010, 07:02 PM   #1
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Roth vs. Trad. IRA - Which to withdraw from first.

Please forgive my ignorance, but I've been wondering about this for a while...

At 59.5 years old I'll have approximately $60,000 in a traditional IRA; and $30,000 in a Roth. My retirement income at that age, without tapping into the IRA's, will be $27,000 annually. If I need/want to withdraw funds from the IRA accounts, is there a rule of thumb or best practice as to which I should withdraw from first due to the Trad. being taxable, while the Roth is not? i.e. Will I be further ahead depleting the funds from the Roth first before tapping into the traditional? Or is there a scenario where perhaps withdrawing a portiion from both makes sense?

Thank you for your time.
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Old 10-09-2010, 07:25 PM   #2
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Try the ORP calculator, it will give you a withdrawal report for each year showing how much to take from IRA vs Roth.
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Old 10-09-2010, 07:47 PM   #3
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Originally Posted by homestead View Post
Try the ORP calculator, it will give you a withdrawal report for each year showing how much to take from IRA vs Roth.
And when you use the calculator make sure it's been given your Social Security estimates, because I'm pretty sure you'll want to use up the traditional IRA before you start drawing SS.
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Old 10-09-2010, 07:50 PM   #4
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Try this too

TurboTax® TaxCaster - Free Tax Calculator - Free Tax Estimator
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Old 10-09-2010, 08:06 PM   #5
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Thanks. I will try the calculator.
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Old 10-09-2010, 08:07 PM   #6
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Generally Roths are withdrawn last to allow tax-free growth for as long as possible. There are exceptions related to current versus future anticipated tax brackets but it's hard to go wrong hanging on to Roths as long as you can.

At least that's my take.
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Old 10-09-2010, 08:24 PM   #7
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Optimal Retirement Calculator and Retirement Decision Support System is the link to the ORP calculator.
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Old 10-09-2010, 09:28 PM   #8
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Originally Posted by Rich_in_Tampa View Post
Generally Roths are withdrawn last to allow tax-free growth for as long as possible. There are exceptions related to current versus future anticipated tax brackets but it's hard to go wrong hanging on to Roths as long as you can.

At least that's my take.
I agree with Rich. You don't need ORP, or anything else, to kow that Roth money is privileged money. There is no other tax free money with such freedom of investments that you can choose.

Guard it well.

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Old 10-09-2010, 10:13 PM   #9
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Quote:
Originally Posted by Rich_in_Tampa View Post
Generally Roths are withdrawn last to allow tax-free growth for as long as possible. There are exceptions related to current versus future anticipated tax brackets but it's hard to go wrong hanging on to Roths as long as you can.

At least that's my take.
And also the question of do you want to leave an estate. If you want to donate your 401k/IRA to charity, its better to leave it that way, because the charity never pays taxes on the balance. The roth is better if you want to leave the 401k to someone else. Note that IMHO the 401k/IRA is the best vehicle to leave something to charity since you escape both the estate tax (if in that bracket) as well as the tax on income in respect of decedent.
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Old 10-09-2010, 11:33 PM   #10
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And also the question of do you want to leave an estate. If you want to donate your 401k/IRA to charity, its better to leave it that way, because the charity never pays taxes on the balance. The roth is better if you want to leave the 401k to someone else. Note that IMHO the 401k/IRA is the best vehicle to leave something to charity since you escape both the estate tax (if in that bracket) as well as the tax on income in respect of decedent.
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Originally Posted by LauAnn View Post
Please forgive my ignorance, but I've been wondering about this for a while...

At 59.5 years old I'll have approximately $60,000 in a traditional IRA; and $30,000 in a Roth. My retirement income at that age, without tapping into the IRA's, will be $27,000 annually. If I need/want to withdraw funds from the IRA accounts, is there a rule of thumb or best practice as to which I should withdraw from first due to the Trad. being taxable, while the Roth is not? i.e. Will I be further ahead depleting the funds from the Roth first before tapping into the traditional? Or is there a scenario where perhaps withdrawing a portiion from both makes sense?

Thank you for your time.
No doubt about it, charitable bequests and gifts are going to be a big factor here...
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Old 10-10-2010, 12:43 AM   #11
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Originally Posted by meierlde View Post
And also the question of do you want to leave an estate. If you want to donate your 401k/IRA to charity, its better to leave it that way, because the charity never pays taxes on the balance. The roth is better if you want to leave the 401k to someone else. Note that IMHO the 401k/IRA is the best vehicle to leave something to charity since you escape both the estate tax (if in that bracket) as well as the tax on income in respect of decedent.
From the info we've been given by the OP, I doubt estate tax will rear its ugly head.
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Old 10-10-2010, 08:50 AM   #12
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My results come out best if I take traditional IRA/401k withdrawals that fill the lower tax bracket and then enough Roth withdrawals to meet my income needs. I imagine this is highly dependent on how close your income is to specific tax brackets and what other income you have. But it is a case where withdrawals from both makes sense. Otherwise, Roth comes out last.
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Old 10-10-2010, 09:11 AM   #13
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My results come out best if I take traditional IRA/401k withdrawals that fill the lower tax bracket and then enough Roth withdrawals to meet my income needs. I imagine this is highly dependent on how close your income is to specific tax brackets and what other income you have. But it is a case where withdrawals from both makes sense. Otherwise, Roth comes out last.
I think this is the situation/approach that the ORP calculator uses.
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Old 10-10-2010, 03:12 PM   #14
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Tax brackets for your traditional IRA (TIRA) withdrawals are the key. If you have the same tax bracket now and later for your TIRA withdrawals, it does not matter whether you get your money from TIRA or Roth. The goal is to minimize the tax bracket at which you withdraw your TIRA money... So, I imagine Animorph's approach is often the best (unless you can also project into the future what your tax bracket will be).
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Old 10-10-2010, 03:23 PM   #15
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Fido has a good discussion on their open web page https://news.fidelity.com/news/artic...es&topic=taxes that addresses using Roth funds to help avoid having SS income taxed at higher rates and for higher income folks avoiding the Medicare Surtax.
While the trade-offs may not be something a lot of folks will have to deal with, it is really amazing how complex enjoying your "stash" is getting to be.
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Old 10-10-2010, 03:35 PM   #16
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As others have pointed out, its all about taxes. A Roth comes in handy keeping taxes low in those years when you may have a large expense like a new car or home repairs. You can also use the Roth funds to reduce how much of your SS is subject to tax. You will have to run a tax simulator to check various scenarios. Good luck!
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Old 10-10-2010, 08:51 PM   #17
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Thanks all. I appreciate the information.
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