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tax diversification, or not
Old 03-05-2018, 11:35 AM   #1
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tax diversification, or not

I've read many threads where posters were at odds with each other or not getting their points across because they were thinking assets were held with differently. I remember one discussion of the SS tax hump where the example was someone who at taken IRA withdraws to just below the SS tax hump and then you needed a few k for an emergency, so the example used that you take it from the IRA. I'm thinking either use your emergency fund or take some from your taxable account.
There are other entering ER in their mid 50's noting all assets are in IRAs and are wondering how you create income without penalties. OK, these are some ways to do this. But these people were living life just before retiring. I would assume (maybe incorrectly) that they had some level of after tax assets while doing so.

The above are just a couple observations from my experiences on this forum. They are not meant to be I'm right and their wrong, but maybe just seeing things from different viewpoints. What I'm more curious about is what roughly are the tax diversification of the ER group? Did you plan this or it just kind of happened? and what do you think helped you the most and biggest head ache?

Approx Tax diversification
56% taxable
37% TIRA
1% annuity
6% RIRA

Thing that has worked, the after tax has been nice. I take dividends (mostly qualified) for spending. Typically little selling goes on.

At ER I have very little RIRA (yes it is still small, but growing). This is likely my biggest mistake/headache. I had already rolled a 401k with tax basis into an IRA by the time Roths came into being. So much of the easy roths were not available.
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Old 03-05-2018, 12:03 PM   #2
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I gave very little thought to tax diversification when I was in the accumulation stage.

During that time, I invested in equity mutual funds in taxable accounts as part of our college savings strategy for our two kids. As it worked out, DD got a small merit "scholarship"... essentially a discount to entice her to attend... and since it was my peak earning years we were able to pay for her college costs from cash flow and not touch the taxable. DS wasn't keen on school and went straight to work but we have told him that we will pay for college if he decides to go.

So by happenstance, when we retired our taxable/tax-deferred and tax-free balances were 44%/53%/3%, respectively since Roths and HSAs came along late in my career. Today, as a result of Roth conversions those ratios are 23%/55%/22% and the total is 125% of what it was when I retired.... all despite our best efforts to spend!

We'll continue to live off of taxable and do annual Roth conversions to FRA or 70 or perhaps until taxable funds decline to a certain $$$ amount and then switch to using tax-deferred funds.
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Old 03-05-2018, 12:05 PM   #3
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I think the important things are:

- Have a plan for bridging from your ER date until you can get at your tax deferred money penalty free.

- Convert as much to a Roth as makes sense to your situation. See my post here: New tax law and ROTH

People are going to have different ratios based on where they are at in the process, and how they got there. A lot of my wealth came from employee stock options, so I have plenty in taxable. I'm roughly 75% taxable, 20% Roth, 5% tIRA. 56yo, 7 years retired. Small pension coming at 65, will give me less than 10% of my annual spending.
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