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Spending down IRA in retirement
Old 01-06-2017, 08:22 AM   #1
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Spending down IRA in retirement

DW and I are looking at our IRA's to sustain us as retirement begins and SS is 6 yrs away at 66. Within our IRA's we have a 43/55/2% equity ETF to bond ETF to cash mix.
I will also be adding an additional portion to our taxable account later in the year through a house downsize.

Specifically, I am seeking perspectives on how to begin liquidating the IRA's....
Equities, bonds or both, etc., so as to minimize the tax impact.

Once the taxable account is padded later in the year, it would seem that pausing the IRA withdrawals and taking from the taxable account would make more sense? Maybe not. Thoughts?

I appreciate the perspectives here!
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Old 01-06-2017, 08:37 AM   #2
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Similar situation (not uncommon here!). Our IRAs will contain the vast majority of our assets and we will delay Social to 70, so many years of living off of them. Our goal is to minimize the tax hit over our lives--while projecting a single taxpayer for a decade at the end.

To maintain your asset allocation, do you have sufficient assets outside the IRAs to shore up equity holdings? Generally, holding equity outside the IRA results in better tax treatment because of the LTCG preferred rate. On the other hand, if you are very lopsided toward the IRA, you'd just sell and withdraw to maintain the AA.

In your case, have you looked at doing Roth conversion(s) during the time that you are living off the taxable account? That could be a good idea if, for example, the IRAs are large enough that RMDs will put you in a higher tax bracket after age 70.5 (or, after one spouse dies...) And it is worth thinking about the tax rates effective at the time you can convert versus the likely/projected/feared level later... (Although nothing is ever certain here.)
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Old 01-06-2017, 09:48 AM   #3
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My opinion, in retirement it makes no sense to delay taking SS. If your assets in the IRA or other investments aren't growing faster than any social security COLA, then they aren't in the right investments. Delaying SS doesn't increase your wealth unless you have a very high confidence you will exceed your life expectancy.

I retired at 55 and took SS at 62.5 and only liquidate assets on an occasional basis, about $200k over 14 yrs. Even with the withdrawals, assets are up about 2.5X and thru smart Roth conversions almost 50% are now free from taxes.
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Old 01-06-2017, 10:20 AM   #4
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Interested in this thread. Retired a little over a year ago. Now going on 60. I am considering taking from my 401k and delaying SS to reduce my taxable income. Not yet sure what I am going to do. I have no Roths.
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Old 01-06-2017, 10:29 AM   #5
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Here is my plan:
If you have a lot in IRA/401K's , then withdrawing from them for living, and possible Roth Conversions while delaying SS to FRA or even 70, will minimize the income tax paid over a lifetime.

As well in the after tax accounts, fully invest in ETF's or stocks but only spend the dividends as the capital gain and dividends are either 0% or 15% taxed (we don't have enough income to get the extra surtax added).

The idea is to draw down the IRA to reduce or eliminate the tax torpedo when RMD's kick in as that amount plus the SS will mean a higher tax rate.

For any young readers: I wish we had put more into ROTH's instead of simply filling up the IRA/401K's , more of a mixture would have been better overall for us.
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Old 01-06-2017, 10:45 AM   #6
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Interested in this thread. Retired a little over a year ago. Now going on 60. I am considering taking from my 401k and delaying SS to reduce my taxable income. Not yet sure what I am going to do. I have no Roths.
If you were still working and had an extra $100 to invest, would you give it to the government to "invest" for you or listen to your financial advisor? Any short term gain in reduced taxes is more than wiped out by lost opportunity to grow the 401K. Also, you can't put SS into a Roth or pass it into an estate. Just my opinion.

I have been doing Roth conversions since 2008, 4 to 6 different Roths with different stocks in Jan. each year, then near April of the next year as I'm doing taxes I decide which to keep and which to recharacterize depending on stock growth and the rest of my tax situation. I've paid about $35k in additional taxes and have about $500k in Roths. Guess I worry more about future taxes rather than current taxes. If I needed $200k for medical costs to save a grandchild's life, I could do it with zero tax consequences.
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Old 01-06-2017, 10:49 AM   #7
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Originally Posted by Sunset View Post
...
The idea is to draw down the IRA to reduce or eliminate the tax torpedo when RMD's kick in as that amount plus the SS will mean a higher tax rate.

For any young readers: I wish we had put more into ROTH's instead of simply filling up the IRA/401K's , more of a mixture would have been better overall for us.
Agree on the tax torpedo--and it gets worse when surviving spouse has to start filing as single, rather than MFJ, as RMD requirements continue to rise.

As for the Roth, it all depends. In our case, we essentially have always paid the highest marginal rates while working. In retirement, we should be able to max out in the 20s for marginal rate (with less than 20% effective rate). While we will pay more in retirement because of no Roths (to speak of) going in, our lifetime tax burden is better because of not doing the Roth contributions/conversions while working.
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Old 01-06-2017, 10:52 AM   #8
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Originally Posted by larrytbm View Post
If you were still working and had an extra $100 to invest, would you give it to the government to "invest" for you or listen to your financial advisor? Any short term gain in reduced taxes is more than wiped out by lost opportunity to grow the 401K. Also, you can't put SS into a Roth or pass it into an estate. Just my opinion.

...
If I was still working, I would probably be putting some extra money into a Roth IRA. Good points you make; that is why I am still not sure what to do. Thanks.
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Old 01-06-2017, 10:57 AM   #9
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I have created a spread sheet that calculates my income tax each year until I am 95. It also calculates fees for Medicare created by higher income. RMDs are included as well as my projected increase in SS when I turn 70 (moving from the late DWs account to mine). I also have a column for Roth conversions. All this allows me to play some "what if" games to actually see what might happen tax wise based on how I move money around. The results are that the Medicare fees (which are really just a tax on higher income folks who are on Medicare) can be substantial and can be controlled by keeping the reportable income below the fee brackets. The results of my spreadsheet analysis is that I am going to be screwed by the IRA tax torpedo. At the same time, it is to my financail advantage to keep my money in the tax deferred accounts until I am required to remove them as RMDs. Because my plans include charitable giving, I will use Qualified Charitable Distributions (QCDs) to move required RMDs to my favorite charity without increasing my tax brackets or Medicare fee brackets.

There are a lot of moving parts. Its a good thing to lay it all out and figure out how it can work best to your financial advantage.
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Old 01-06-2017, 11:01 AM   #10
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Agree on the tax torpedo--and it gets worse when surviving spouse has to start filing as single, rather than MFJ, as RMD requirements continue to rise.

As for the Roth, it all depends. In our case, we essentially have always paid the highest marginal rates while working. In retirement, we should be able to max out in the 20s for marginal rate (with less than 20% effective rate). While we will pay more in retirement because of no Roths (to speak of) going in, our lifetime tax burden is better because of not doing the Roth contributions/conversions while working.
The strategy for those who retire early is to delay SS until 70 using roth conversions in the intervening years. I am not trying to optimize this strategy to the nth degree, but instead am only converting up to the 15% tax bracket, which I know is lower than if I didn't convert when delaying SS. I am also in the fairly unique position of having $2 of every $3 in taxable, so am drawing down taxable until 70 to keep conversion taxes low. Another reason I am converting to Roth is to minimize possible negative consequences of future tax reform (Roths are tax-free).
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Old 01-06-2017, 11:02 AM   #11
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Thank you....These are all excellent points to ponder. There are also an array of them.
That said, in seeking professional counsel, would this best be taken up by a CFP or a CPA?

Anybody used either or both to their satisfaction?

Thanks!
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Old 01-06-2017, 11:03 AM   #12
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Old 01-06-2017, 11:09 AM   #13
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We are 7 years into retirement and I'll be 62 next month, DW will be 62 in November and will begin taking her SS. As a couple we have decided that I should delay my SS until 70 to maximize her income as I'm statistically more likely to die first and she will lose 50% of my DB pensions when I die.

Our after tax investments are in VG Equity ETF's from which we have been taking qualified dividends. Added to our pensions that still has not covered our expenses each year so I've been using the I-Bond stash that we had accumulated plus selling equities as needed. Once we reached age 59.5 I started using the dividends given off by our Roth IRA's which are invested in Wellesley and Wellington plus an international and US bond fund. I use trades in the Roth and IRA accounts to re-balance each year as they have no tax impact.
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Old 01-06-2017, 11:25 AM   #14
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The strategy for those who retire early is to delay SS until 70 using roth conversions in the intervening years. I am not trying to optimize this strategy to the nth degree, but instead am only converting up to the 15% tax bracket, which I know is lower than if I didn't convert when delaying SS. I am also in the fairly unique position of having $2 of every $3 in taxable, so am drawing down taxable until 70 to keep conversion taxes low. Another reason I am converting to Roth is to minimize possible negative consequences of future tax reform (Roths are tax-free).
We are on the same page, apart from us having far higher percentage of portfolio in tax deferred. Because of that we need to go closer to the nth degree before starting whatever social is going to be there for us in 2030/31 (still not counting on it, but that's becoming obscenely conservative at this point). Once working income stops, we'll start converting at least to top of 25% bracket--as always, subject to markets not vaporizing our holdings.
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Old 01-06-2017, 11:28 AM   #15
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Thank you....These are all excellent points to ponder. There are also an array of them.
That said, in seeking professional counsel, would this best be taken up by a CFP or a CPA?

Anybody used either or both to their satisfaction?

Thanks!
Have not used either. There have been a number of discussions here about the difficulty of finding someone who can deal adequately with all the moving parts. If you search for CFP or "Fee only planner," you'll likely find discussions.
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Old 01-06-2017, 11:52 AM   #16
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That said, in seeking professional counsel, would this best be taken up by a CFP or a CPA?
It might be possible to find one that specializes in retirement, but I'd bet they'd simply follow a "rule of thumb".

For instance, they may say pull enough out of your IRA to top-out the 15% bracket, use that plus your already taxed funds to fund your spending. Or maybe they'd say convert tIRA to Roth up to the 15% bracket and fund your spending with already taxed funds. But you could probably get a better answer by plugging your information into i-orp.com.

i-orp runs an optimization that includes taxation and covers "all years". It will sometimes come-up with a different approach than the rules of thumb. The recommendations of the tool often have the retiree paying more taxes early in order to reduce taxes later. That doesn't sit well with some people because there's no guarantee that the retiree will live-out the entire plan (ie they'll never hit break-even paying taxes early vs late).

Set aside at least an hour and construct your inputs for i-orp carefully. It will give you one plan for how to pull retirement assets over your planning horizon.
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Old 01-06-2017, 11:59 AM   #17
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I have never liked i-orp. Discussions on the BH forum aren't necessarily keen on it, either. I would never follow its recommendations resolutely.
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Old 01-06-2017, 12:02 PM   #18
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^That's why I said "it will give you one plan". Not that you need to follow it exactly, but it might give one ideas for things to try in your own spreadsheet.

Not that you'd be obliged, but from your description of your withdrawal strategy in an earlier post, it looks like something i-orp might have recommended. Did it offer something wildly different?
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Old 01-06-2017, 12:03 PM   #19
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I think this question can only be answered by you. For example, taking SS early may make sense, depending on life expectancy. Your financial advisor cannot tell you life expectancy but can help you quantify the potential difference between different options.

The Roth conversions certainly make sense for early retirees if you have room in those lower tax brackets. It makes even more sense if you are facing high taxes after RMD's begin. A financial advisor can help determine that risk.

I do not regret having relatively little money in Roths. In my analysis, it just did not make sense during work years paying taxes at high rates (as well as not qualifying for Roths due to income). But they can make a lot of sense now, as you have visibility to your tax situation out a few years.

As far as your investments doing better than the 6-8% return you get from letting your SS grow, hard to project the future and know that will be the case.

On the SS piece, we may have DW take SS early. Hers is the lower of the two Then mine we will take at full retirement age. Could change depending on facts at the time.

I think a fee-based financial advisor could be a help. I am a Cpa myself but i plan to use one as we get a little closer since personal financial planning is not my expertise professionally.
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Old 01-06-2017, 12:15 PM   #20
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I'd do ROTH conversions and keep your IRA withdrawals and conversions to a level that when combined with your other taxable income sources keep you in the 15% tax bracket so that dividends are tax free. If you need income above that level take it from taxable accounts.
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