taxable vs. tax deferred account withdrawals--question for you all

[gardenfun]

I have about 10% of my retirement funds in a taxable account, 90% in traditional IRA’s.

I have a small pension of $10,000 a year, and a parttime online teaching job that earns me around $9000 a year. So the rest of my expenses need to be funded from my investments, at a 2.5% to 3.0% SWR until I take SS.

This year I am trying to keep my MAGI under the 400% poverty level so that I can continue to receive subsidies for ACA. By the way, I am renting and no longer have any itemized deductions. I am single and 60 years old.

When I first joined the forum and read posts that said “I’m taking dividends and capital gains up to the 15% tax bracket”, I really had no idea what that meant. Slowly I’ve come to understand and assume that those are dividends and capital gains from folks’ taxable accounts. (There was a thread a while ago where folks posted the percentages they had in taxable and tax deferred accounts—that was very interesting). Since my taxable account is such a small percentage of my overall savings, I don’t think I can do the same thing—live off the dividends.

I think I am kinda stuck with most having to fund most of my expenses with taxable (IRA withdrawals) “income”. I’ve been reading about and trying to understand the concept of Roth conversions, but those would be taxable as well, correct?

I just wanted to ask if I’m missing something? There’s really no way to minimize my MAGI, or my tax bracket for that matter, other than keeping my expenses under the 400% poverty level ($46,900 for a single person as I understand it). OR spending down my comparatively small taxable account instead of making too many taxable withdrawals from the IRA? Not sure if that would be a good idea.

If it was just me, I could manage my expenses to keep the ACA subsidies. But 2014 happens to be a year when both my kids could use a little help to move into the next phase of their lives—probably 2 or 3 thousand for each would do it. But $6000 more in an IRA withdrawal would put me over the limit for subsidies. But then I think—I’m so fortunate to be where I am, what’s a few thousand more in subsidy repayment in the long run? I would rather help my sons with a little bit now rather than 30 years from now. And I have had these IRA’s for almost 30 years without paying any taxes on them—I understand that it’s time!

Any advice would be much appreciated! I have learned so much from this forum about these issues. I’m just looking for some confirmation of my understanding of the tax and ACA implications of my situation. Thanks!!

[jclarksnakes]

How much is in the taxable accounts? I would not hesitate to spend them down to keep your MAGI low enough to qualify for the ACA subsidy until you start on Medicare.

[steelyman]

I don't even include my "taxable" accounts (things held at a brokerage or fund company). I suppose I think of them like home equity.

On the retirement side, I have 70% in tax-deferred and 30% in tax-free (Roth).

To answer one of your questions: yes, a Roth conversion is taxable.

[gardenfun]

Quote:

Originally Posted by jclarksnakes How much is in the taxable accounts? I would not hesitate to spend them down to keep your MAGI low enough to qualify for the ACA subsidy until you start on Medicare.

Good point. I have 4.5 years until I go on Medicare, so I could take the bulk of the funds I need for expenses from the taxable account for the relatively short time until I no longer need the ACA subsidies. I think I could manage it given the amount I have in there.

And then at 65 I'll start worrying about RMD's coming up at 70. And figuring out the consequences of taking SS at the different ages. But one worry at a time!

[woodguy00]

Your last post is right on.

Use taxable accounts plus wages and pension until age 65 when medicare kicks in. Keep O-MAGI at 399% of poverty level through use of taxable accounts and Roth conversions if possible. Enjoy life.

After 65 until 70.5, deplete any taxable accounts remaining for living expenses. Use IRA's for living expenses and do Roth conversions bringing income right up to the top of the 15% bracket. Enjoy life.

After age 70, take RMD's as required and collect SS, Roth conversions if there is room under 15% cap. If not, pay higher taxes on the combined RMD/SS income and enjoy life.

I'm sure others will correct me if I've missed anything major.

[donheff]

Quote:

Originally Posted by gardenfun Good point. I have 4.5 years until I go on Medicare, so I could take the bulk of the funds I need for expenses from the taxable account for the relatively short time until I no longer need the ACA subsidies. I think I could manage it given the amount I have in there. And then at 65 I'll start worrying about RMD's coming up at 70. And figuring out the consequences of taking SS at the different ages. But one worry at a time!

This makes sense to me. I am in a different but somewhat parallel situation. About 20% of our portfolio is in taxable. Our pension income already throws us into a fairly high tax bracket so we pull all withdrawals from the taxable component now and will only turn to tax differed when we reach RMD age (or deplete taxable). The net effect (assuming relatively flat spending throughout retirement) is to reduce withdrawals in the early years while increasing in the later (due to increased taxes). Our thinking is that the early years have the most impact on survivability and that it will be easier to reduce spending when we are older (we have a safe gap with lots of discretionary activities like travel that tend to reduce with age) in the event that the future turns out to be cloudy. Our thinking is similar to your ACA subsidy situation - get the benefits you can now when they are clear and important. Just remember that expenses (including taxes) will rise when you turn to tax differed withdrawals.

[pb4uski]

Quote:

Originally Posted by donheff This makes sense to me. I am in a different but somewhat parallel situation. About 20% of our portfolio is in taxable. Our pension income already throws us into a fairly high tax bracket so we pull all withdrawals from the taxable component now and will only turn to tax differed when we reach RMD age (or deplete taxable). The net effect (assuming relatively flat spending throughout retirement) is to reduce withdrawals in the early years while increasing in the later (due to increased taxes). Our thinking is that the early years have the most impact on survivability and that it will be easier to reduce spending when we are older (we have a safe gap with lots of discretionary activities like travel that tend to reduce with age) in the event that the future turns out to be cloudy. Our thinking is similar to your ACA subsidy situation - get the benefits you can now when they are clear and important. Just remember that expenses (including taxes) will rise when you turn to tax differed withdrawals.

Are you doing or have you considered doing Roth conversions from now until you are 70 if RMDs will hoist you into a higher tax bracket? many of us are doing Roth conversions to the top of our current tax bracket to try to reduce RMDs and higher taxes later.

[donheff]

Quote:

Originally Posted by pb4uski Are you doing or have you considered doing Roth conversions from now until you are 70 if RMDs will hoist you into a higher tax bracket? many of us are doing Roth conversions to the top of our current tax bracket to try to reduce RMDs and higher taxes later.

We are in the 25% bracket. We will remain in 25% or just nudge into 28% when I hit RMDs in five years and move quite a bit more into the 28% bracket when DW hits RMDs in 9 years. Filling out the 25% bracket now doesn't appeal to me although I confess I have not analyzed the numbers.

[gardenfun]

Thanks, guys, for confirming my inclination to tap into the taxable savings first, even though the amount there is smaller than what is in my tax-deferred savings. At least for these next few years when I want to keep my ACA subsidies intact.

And thanks especially for the advice to "enjoy life". That definitely resonates with me. I was feeling like I was obsessing a bit over a few thousand dollars here or there. I know lots of folks here like to do that as a hobby in ER but in the long run, when I'm 75 I'm pretty sure I will have no recollection of what tax bracket I was in when I was 61. What I'm trying to say is that I like the philosophy of not fretting about small amounts of expenses/taxes. I feel pretty confident in my long term financial situation. I want to be in the moment now, and enjoy my kids and grandkids.

Next goal: To move said taxable account and IRA's from Wells Fargo to Vanguard. (my WF accounts are about 2/3 of my savings--the rest is at Etrade). This forum has given me the knowledge and confidence to "go out on my own."

[FinanceDude]

This thread reminds me of an old saying: "Capital gains are the cost you bear for doing WELL"...........

[woodguy00]

Quote:

Originally Posted by donheff We are in the 25% bracket. We will remain in 25% or just nudge into 28% when I hit RMDs in five years and move quite a bit more into the 28% bracket when DW hits RMDs in 9 years. Filling out the 25% bracket now doesn't appeal to me although I confess I have not analyzed the numbers.

It's a much tougher case to make paying 25% now to avoid 28% in the future than it is from 15% to avoid 25%.

You have a really good problem to have!

[pb4uski]

Quote:

Originally Posted by woodguy00 It's a much tougher case to make paying 25% now to avoid 28% in the future than it is from 15% to avoid 25%. You have a really good problem to have!

+1 my thoughts exactly. I'd roll the dice on the 3% difference.

One thing to consider though is if either of you were to pass away, it might kick the remaining single taxpayer up into the 33% tax bracket and make 25% look better.