Tax question re moving $$ from one bucket the next.

[tednvon]

Hello,

1st year of ER going well. I do have a tax question. We currently have 4 years of expected expenses in cash in short term CD, kind of waiting for the rates to keep going up. It is now about time for our 1st  move of about 40K from 403b bond fund to a CD to make a 5 year cushion.

This is spouse's 403B as she if fully retired and over 59 1/2. I am still employed 1/2 time with 403b but not yet 59 1/2.

She has 48K of her 125K in Roth. My 403b plus hers plus cash gives us 4% SWR of 40K.

Any formula as to how to move the money to make the 40K part of the 5 year cushion? I know that regular 403b is taxed and Roth principle is tax free. Do I move the money all at once and just pay the tax on the withdrawel or try to spread it out over the year...

Maybe a dumb question, sorry!  But I really seem  to get the big picture of the great 3 bucket theory, just not sure how to do the first big switch from the 403b. FYI, this this is CREF money and they offer no CD's just low interest money market for cash, not where I want the $$.

Thanks...Ted

 

[Martha]

Why so many years of money in CDs? It seems like a cash cushion of five years is a lot.

 

[Nords]

Why so many years of money in CDs?  It seems like a cash cushion of five years is a lot. 

Frank Armstrong suggests seven years, which would have covered the worst of the worst. Five years is probably what most books/advisors feel would survive the majority of bears.

We only keep two years in cash.

 

[ats5g]

Hi Ted,

I'm a little confused. As I read it, you've got the 40K in the CREF MM [which is currently yielding around 3.40%]. Are you going to be withdrawing this money from the 403(b)? Or is that part of your question?

Does your wife have access to TIAA traditional fixed account as well? If this is an SRA [or an account without the TIAA transfer restrictions], the current TIAA rate for money put in until 10/31 is 4%. There are no transfer restrictions for the TIAA fixed account in an SRA.

On thing might be to start laddering 4 yrs of spending money into 1, 2, 3, 4 yr CD's. Rates might not keep going up.

- Alec

 

[tednvon]

Hi..sorry for the confusion...like I said in an earlier post...I don't understand all the ins an outs of these plans, I just follow advice of good people here...

All 403b funds are in CREF, no TIAA annuity funds. Cash in CD coming due in Nov. So here is the scenario:

Currently...4% CD coming due November 15....$115,000

Step 1. Will move about 40K to ING liquid acct at 3.40% (or local bank acct if they can beat 3.40%, but I doubt it) and transfer 3K/month to bank acct. over the next year.

Step 2. Will Probably purchase appx. 1yr 75K 4.25 CD from best source...bank or ING.

Step 3. Need to move 40K from CREF 403b/SRA which is 70% stocks and 30% bonds to a CD which will give 5 year cushion of "safe" $$. I will then move 40K from stocks to bonds in CREF acct. to keep appx 70-30 split.

I hope I am clear so far...

Now, question is....This is my first move of "taxable" $$ from CREF. I will use spouses funds now since she is 59 1/2 and no penalty to withdraw.
I am asking how to move this $$. One lump sum withdrawal to a her, pay the tax, and then we will purchase CD?? (I may be mistaken, but I do not see CREF offering a CD or a high yield MM account that can match ING.) Also should part of withdrawal be from Roth and part tradtional to lower taxes?

If this does not make sense, I will go back and do my homework again...

I appreciate the input....FYI...5 year cushion is what folks here say is smart and safe....

peace...Ted

 

[Dry Socks]

Should laddered CDs be counted differently than treasuries from an allocation perspective ?

I was thinking we'd want around 40% bonds when we RE. Wouldn't that be much more than 5 years of living expenses ?

Sorry if this question is off topic.

 

[JohnP]

ted -

Congratulations on retiring!  I'm assuming that both of you are now receiving some sort of a pension from a teachers retirement system;  this means that you will be paying more in income taxes for each $ that you withdraw from tax-deferred accounts such as your 403b's. 

I think one of your questions was 'what is the priority of removing funds from various taxable, tax-deferred, and Roth accounts during retirement?'  If that is the question, then the answer is that until 70 1/2 you take funds from Taxable accounts first, after age of 70 1/2 take RMD from Tax-deferred accounts (Required Minimum Distribution) and the rest of the 4% from taxable accounts, and when one or the other account is depleted dig into the Roth accounts for expenses.  This way you are deferring spending 100% taxed distributions until required by the Govt as a part of the 401k, 403b, etc. IRA tax-deferral system. 

Still don't know for sure what you are asking relative to the 40K from your 403b CREF account;  I'd be very careful not to take 40k out of your 403b and move it to your spending account because you will then have 40k added to your income for this tax year; if you have any other after-tax accounts where you could get that amount, you will be ahead by the fed and state taxes you will pay at the highest rate for your income.  Further, taking it in increments will only smear that 40k income over the next year and you will basically not save on your taxes over that time.

If you do have already taxed savings that would give you 40k, I'd recommend rethinking your plans for digging into the 403b funds for now.  I think that most REers are waiting till 70 1/2 to touch their IRAs, 401k's, and 403b's because of the tax hit from the tax-deferred accounts. 

Best regards

JohnP

 

[soupcxan]

Question 1: With as much cash as you have on hand, why not open an emigrant direct account? They have just as much FDIC insurance as ING and will give you an extra 60 basis points...normally it might not be worth the effort, but for the amounts you're talking about it definitely adds up over time...and it would only take an hour to setup anyway. ING has shown that they're not interested in being the high-yield savings leader.

Question 2: Why would you lock yourself into a 1 year CD (given the potential for more rate increases in the near future) for only a 25 basis point premium over an emigrant direct account? Seems like you get a very small reward for giving up a lot of flexibility.

Given your large amounts of cash you hold, I don't see why you havent opened an ED account. You're just leaving money on the table.

Step 1. Will move about 40K to ING liquid acct at 3.40% (or local bank acct if they can beat 3.40%, but I doubt it) and transfer 3K/month to bank acct. over the next year.

Step 2. Will Probably purchase appx.  1yr  75K 4.25 CD from best source...bank or ING.

 

[tednvon]

Will check into emigrant...thanks...Ted

 

[Mr._johngalt]

Question 1: With as much cash as you have on hand, why not open an emigrant direct account? They have just as much FDIC insurance as ING and will give you an extra 60 basis points...normally it might not be worth the effort, but for the amounts you're talking about it definitely adds up over time...and it would only take an hour to setup anyway. ING has shown that they're not interested in being the high-yield savings leader.

Question 2: Why would you lock yourself into a 1 year CD (given the potential for more rate increases in the near future) for only a 25 basis point premium over an emigrant direct account? Seems like you get a very small reward for giving up a lot of flexibility.

Given your large amounts of cash you hold, I don't see why you havent opened an ED account. You're just leaving money on the table.

I have a local bank which will give me 3.75% on money I must keep liquid. I see I can do a bit better at Emigrant, but I just am old-fashioned enough to prefer talking to real face-to-face people.

JG