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tax deferred or taxable
Old 12-19-2010, 05:08 PM   #1
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tax deferred or taxable

Have 250k in a tax deferred account and another 100k in a taxable account. I need 12k annually to supplement pension. I understand it is probably wise to withdraw from taxable account first but I am wondering if it is wise to withdraw 12% from that account and have it be depleted too fast. Also while the tax provision has been extended maybe I should draw from the tax deferred account first. Or at least for the first couple of years while I am still in the 15% bracket. Maybe I could do a combination of both.
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Old 12-19-2010, 05:15 PM   #2
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Most folks would use up the taxable money while converting bits of the tax-deferred to Roth IRA while in a low (possibly 0%) tax-bracket. They would use the money in taxable to pay the taxes on the conversion.
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Old 12-19-2010, 05:19 PM   #3
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Probably withdrawing enough tax deferred to hit the top of the 15% bracket would be a good idea. Actually a conversion to Roth would be even better, using taxable funds to pay the tax. That way you essentially move the taxable funds into a Roth and avoid future taxes.

You might want to retain some taxable account funds just for flexibility. You probably don't want to pay for a new car, for instance, by taking a big lump sum out of a tax deferred account and blowing your tax planning out of the water.
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Old 12-19-2010, 05:39 PM   #4
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To me these kinds of questions are the absolute hardest part of personal financial planning. There really is no way to optimize as there is so much uncertainty.

If I had it to do over, I would work longer until I had 3x a generous estimate of the amount needed to give a reasonable margin for a simple plan to finance a satisfying life. A simple plan, not necessarily a simple life as it is sometimes defined.

That way I would have a margin to deal with expensive marriage outcomes (at least one of them anyway!) and a few other balls bouncing the wrong way.

Ha
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Old 12-19-2010, 05:48 PM   #5
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I don't think I would like to convert to a Roth. I do not think it is a wealth builder. I think it benefits the government more because they get there money up front. You either pay the tax now or later. I know some people might argue that taxes eventually are going to go up but do you think congress will keep their promise with the Roth?
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Old 12-19-2010, 06:12 PM   #6
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I don't think I would like to convert to a Roth. I do not think it is a wealth builder. I think it benefits the government more because they get there money up front. You either pay the tax now or later. I know some people might argue that taxes eventually are going to go up but do you think congress will keep their promise with the Roth?
I have the exact same concern. Will Congress eventually change the rules and make Roth earnings taxable? There is no answer but I do not trust Congress to keep their word on anything.
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Old 12-19-2010, 06:15 PM   #7
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One doesn't need to convert everything to a Roth. So you don't need to go 100% no Roth nor 100% Roth. That is, you can hedge your bets and diversify.
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Old 12-19-2010, 07:18 PM   #8
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I don't think I would like to convert to a Roth. I do not think it is a wealth builder. I think it benefits the government more because they get there money up front. You either pay the tax now or later. I know some people might argue that taxes eventually are going to go up but do you think congress will keep their promise with the Roth?
Well, if a VAT shows up, there goes your Roth 'untaxablelessness'
Full disclosure, I am planning with both Roth and non-Roth 401(k).
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Old 12-19-2010, 10:14 PM   #9
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Well, if a VAT shows up, there goes your Roth 'untaxablelessness'
Full disclosure, I am planning with both Roth and non-Roth 401(k).
do you really think if a VAT enters the scene it will eliminate the other taxes we are so used to paying? in addition, if it does chase away the "other taxes," do you think the gummit will allow you to have deferred those taxes all those years and then all of the sudden relieve you of that responsibility? i suspect there will be little change to current tax code and a VAT will just be lagniappe.

i also hedge my bets, as my moola is just about evenly split between roth and tax deferred. if you can convert some for hardly any taxes, why not?
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Old 12-19-2010, 10:36 PM   #10
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I did a conversion from IRA to Roth this year, will pay taxes in 2011/2012 (I did the math and it's a lot better for me, taxwise).

However, I chose what I put into the Roth very carefully: corporate bonds that pay 7% and were valued below par so the capital gain will not be taxed either; stocks that had capital gain potential and paid a healthy dividend.

The dividends and capital gain would have been taxed at some point when I removed them from an IRA.

Everyone's situation is different - that's just what worked for me. I have a much larger IRA than Roth IRA and do my own investing (not mutual funds).
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Old 12-19-2010, 11:54 PM   #11
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do you really think if a VAT enters the scene it will eliminate the other taxes we are so used to paying?

No, IMO a VAT will just be slowly added on, like current sales taxes. When I was a youngster 20 years ago, sales tax used to be 5%, we are now at 8.5%. The VAT will start at 1%...then 2% after a few years who knows?!?
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