Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Withdrawal question.
Old 12-12-2011, 10:13 AM   #1
Dryer sheet aficionado
sailfish's Avatar
 
Join Date: Jun 2008
Posts: 49
Withdrawal question.

DW and I are both approaching 66 yrs old and retired, and I would like opinions on withdrawing expense money. I can withdraw enough from either our IRA or a standard after tax account, to supplement pension, SS, etc.
Should I let the IRA's just keep rolling over and use the taxable accounts, which would let the IRA's build or use IRA for expenses so it won't increase as much and force me to take out more when the RMD kicks in at 70 1/2 yrs old.
I'm sure I will get both sides of the question answered as there a lot of savvy people on this site.
Thanks,.
__________________

__________________
sailfish is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 12-12-2011, 10:22 AM   #2
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 16,407
I would use the taxable account for any withdrawals. On the IRAs, I would do a Roth conversion each year to bring my taxable income for the year to the top of the 15% tax bracket to mitigate the RMD issue.

Also, I think it is best that my IRA holds my fixed income and my equities go into my taxable account to also optimize taxes.
__________________

__________________
pb4uski is offline   Reply With Quote
Old 12-12-2011, 10:26 AM   #3
gone traveling
 
Join Date: Apr 2009
Location: Eastern PA
Posts: 3,851
IMHO, the question is how much in excess RMD's will you have to take out (and pay taxes on) after the age of 70.5?

I use the term "excess RMD", since it's really not a problem to take out RMD's if you need them for current year's expenses. However, if you are forced to take out more than you need, the increase in taxes - along with reinvesting the proceeds in a taxable account, brings up more things to consider.

Just an FYI as a person who does not have a company pension and desires to reduce my excess RMD's in the future, I've been drawing down on my tax-deferred accounts and leaving my Roth IRA alone, along with delaying SS till age 70 (another discussion).

In my case, being older (mid-60's), the "push" was to get into TIRA/401(k) at the time they first came out, during my employment years. That resulted in a good bit of my retirement funds still to be taxed.

I solved part of that problem by getting an SPIA upon retirement (not to discuss, in this thread), but it did result in a good reduction of funds not subject to future RMD's. The delay in SS will also cause an accelerated draw-down of tax deferred funds before age 70.5.

In case you're wondering, we don't have space left in the 15% bracket to convert TIRA's to Roth's nor do we have much in post-tax funds to pay the additional taxes without taking it from pre-tax (which generally is a no-no). Also, we don't have a specific need to convert from a future tax savings POV, since the remainder of our tax deferred holdings will be going to charity and not taxed (depending on current tax law) upon our passing.

Every situation is different; just our story, since you asked...
__________________
rescueme is offline   Reply With Quote
Old 12-12-2011, 11:01 AM   #4
Thinks s/he gets paid by the post
73ss454's Avatar
 
Join Date: Oct 2004
Location: LaLa Land
Posts: 4,378
I'm 62 and using taxable for living expenses. Holding off SS for now and doing Roth conversions up to the top of the 15% bracket.
__________________
Work is something you do to get enough $ so you don't have to....Me.
73ss454 is offline   Reply With Quote
Old 12-12-2011, 01:41 PM   #5
Thinks s/he gets paid by the post
 
Join Date: Jul 2005
Posts: 3,862
+1 Taxable and Roth conversions now, staying out of higher tax brackets. When taxable money runs out, it's traditional IRA up to the tax bracket (or RMD) topped off by the Roth as needed. Your trying to take out as much as you can in your lowest tax brackets and avoid the higher brackets as much as possible.
__________________
Animorph is offline   Reply With Quote
Old 12-12-2011, 05:14 PM   #6
Full time employment: Posting here.
tightasadrum's Avatar
 
Join Date: Aug 2006
Location: athens
Posts: 802
At 65 I see RMD's at 70 1/2 as my main tax issue. Like the other posters, I try to move the maximum up to 15% top bracket into a Roth. If tax rates increase in the next few years, it could even be worse. For anyone with a pension + SS, RMD taxes become a bigger tax issue. (Good news/Bad news). Estate issues increase the problems because of additional taxes on IRA money. I don't see a good way around it.
__________________
Can't you see yourself in the nursing home saying, " Darn! Wish I'd spent more time at the office instead of wasting time with family and friends."
tightasadrum is offline   Reply With Quote
Old 12-12-2011, 10:19 PM   #7
Thinks s/he gets paid by the post
 
Join Date: Mar 2004
Posts: 1,988
I'm puzzled about all those converting up to the 15% bracket

I ran a online calculator at Fidelity and it says I'd be losing money if I converted.

Is there a special set of circumstances that makes the conversion viable?

omni
__________________
omni550 is offline   Reply With Quote
Old 12-12-2011, 10:39 PM   #8
Moderator Emeritus
Rich_by_the_Bay's Avatar
 
Join Date: Feb 2006
Location: San Francisco
Posts: 8,827
Quote:
Originally Posted by omni550 View Post
I'm puzzled about all those converting up to the 15% bracketi
If your current marginal tax bracket is lower than you feel your future tax bracket will be (adding back SS, qualified IRA and similar distributions) the strategy may benefit you. So, you withdraw from your IRA and pay 15% today to avoid paying > 15% in the future. You have to consider your own circumstances.

Another advantage is that by doing this for a few years you will have a lower required minimum distribution amount (smaller qualified portfolio) when that time arrives.

It can backfire under some circumstances but that doesn't seem likely for our situation.
__________________
Rich
San Francisco Area
ESR'd March 2010. FIRE'd January 2011.

As if you didn't know..If the above message contains medical content, it's NOT intended as advice, and may not be accurate, applicable or sufficient. Don't rely on it for any purpose. Consult your own doctor for all medical advice.
Rich_by_the_Bay is offline   Reply With Quote
Old 12-13-2011, 10:29 AM   #9
Moderator Emeritus
Nords's Avatar
 
Join Date: Dec 2002
Location: Oahu
Posts: 26,616
Quote:
Originally Posted by omni550 View Post
Is there a special set of circumstances that makes the conversion viable?
As Rich said, by age 70 you may already have enough interest & dividend income to be in the 15% bracket. Add in Social Security and you could be pushing the top of the 15% bracket. Add in an RMD and you're paying IRA withdrawal taxes in the 25% bracket.

You could start SS at age 62 or start RMDs at age 60 to keep both income levels down, but that seems like forcing a permanent reduction of income to avoid paying higher taxes. I think you'd lose more income than you'd avoid in taxes. And, of course, you'd pay more years of income taxes anyway because you'd be starting those income streams earlier.

It's a tough math problem, which is why there are so many websites & calculators. I think Fidelity does a pretty good overall job, but I think Fairmark.com does a better job of analyzing the conversion issues before you start entering data.
__________________
*
*

The book written on E-R.org, "The Military Guide to Financial Independence and Retirement", on sale now! For more info see "About Me" in my profile.
I don't spend much time here anymore, so please send me a PM. Thanks.
Nords is offline   Reply With Quote
Old 12-13-2011, 10:32 AM   #10
Moderator
ziggy29's Avatar
 
Join Date: Oct 2005
Location: Texas
Posts: 15,612
Quote:
Originally Posted by omni550 View Post
I'm puzzled about all those converting up to the 15% bracket

I ran a online calculator at Fidelity and it says I'd be losing money if I converted.

Is there a special set of circumstances that makes the conversion viable?
Yes, if you think your RMDs would kick you above the 15% bracket, it makes some sense to convert now to use up that bracket. If you don't think your RMDs will kick you above that bracket (even if you withdraw/convert nothing before age 70.5), it's of limited value if any.

If you aren't yet collecting SS, that needs to be considered as well.
__________________
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)

RIP to Reemy, my avatar dog (2003 - 9/16/2017)
ziggy29 is offline   Reply With Quote
Old 12-13-2011, 11:27 AM   #11
Thinks s/he gets paid by the post
 
Join Date: Jul 2005
Posts: 3,862
Quote:
Originally Posted by omni550 View Post
I'm puzzled about all those converting up to the 15% bracket

I ran a online calculator at Fidelity and it says I'd be losing money if I converted.

Is there a special set of circumstances that makes the conversion viable?

omni
In our case we'll have several years of ER before SS, pension, and RMD's kick in. After that happens we'll be well into the 25% bracket. But until then we'll only have capital gains from taxable accounts as we spend them down in the early years. That gives us a chance to convert some of our traditional IRA's into Roths at 15% tax rate. We avoid future taxes on those converted funds and end up with even more after-tax value in tax sheltered accounts.
__________________
Animorph is offline   Reply With Quote
Old 12-13-2011, 11:39 AM   #12
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 16,407
In short, paying 15% today to the taxman on conversions is better than paying 25% or more later on RMDs.
__________________
pb4uski is offline   Reply With Quote
Old 12-13-2011, 01:55 PM   #13
Thinks s/he gets paid by the post
Finance Dave's Avatar
 
Join Date: Mar 2007
Posts: 1,046
Quote:
Originally Posted by Animorph View Post
+1 Taxable and Roth conversions now, staying out of higher tax brackets. When taxable money runs out, it's traditional IRA up to the tax bracket (or RMD) topped off by the Roth as needed. Your trying to take out as much as you can in your lowest tax brackets and avoid the higher brackets as much as possible.
I think this is the key...it will depend on how much $$ you need to live. If you need quite a bit (as I will), then taking out of taxable up to a low bracket and then any remainder from an after-tax type of account is a good strategy IMO. Also consider your RMDs as pointed out earlier.
__________________
"Live every day as if it were your last, and one day you'll be right" - unknown
Finance Dave is offline   Reply With Quote
Old 12-13-2011, 03:23 PM   #14
Thinks s/he gets paid by the post
Bikerdude's Avatar
 
Join Date: Jul 2006
Posts: 1,901
I used after tax $$ until they ran out and converted to a Roth up to the 15% bracket as has been recommended. My RMD should be close to what I will need to live on after 70.5. The Roth will allow me to remain in the 15% bracket until it is exhausted. The Roth $$ come in handy for large expenditures that would otherwise push you into a higher bracket.

I think the general rule is not to pay taxes now that you can pay later, especially if the future taxes are the same or greater.
__________________
“I guess I should warn you, if I turn out to be particularly clear, you've probably misunderstood what I've said” Alan Greenspan
Bikerdude is offline   Reply With Quote
Old 12-13-2011, 05:10 PM   #15
Full time employment: Posting here.
 
Join Date: Mar 2010
Location: Chicago
Posts: 867
I don't know about filling up your 15% tax bracket for Roth conversion. It is a lot of money in my case. It seems this way the government is getting their money up front. Who says in the future that congress will continue to honor the roth. For me I am just drawing dividends from taxable and some from my retirement account. This way my kids can get the stepped up basis of taxable. I guess everybody's situation is different.
__________________
ripper1 is offline   Reply With Quote
Old 12-13-2011, 06:46 PM   #16
Thinks s/he gets paid by the post
73ss454's Avatar
 
Join Date: Oct 2004
Location: LaLa Land
Posts: 4,378
Quote:
Originally Posted by ripper1 View Post
I don't know about filling up your 15% tax bracket for Roth conversion. It is a lot of money in my case. It seems this way the government is getting their money up front. Who says in the future that congress will continue to honor the roth. For me I am just drawing dividends from taxable and some from my retirement account. This way my kids can get the stepped up basis of taxable. I guess everybody's situation is different.
Maybe so but if you have 10 or 15 years to go before RMD's your IRA can double or triple in that time. I'd rather pay 15% now on the lower amount.
Even if it's 15% RMD's it will be on the larger amount as your account grows if you do not convert.

As of right now the ROTH can grow and you are locked in.
__________________
Work is something you do to get enough $ so you don't have to....Me.
73ss454 is offline   Reply With Quote
Old 12-13-2011, 10:11 PM   #17
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Chuckanut's Avatar
 
Join Date: Aug 2011
Location: West of the Mississippi
Posts: 6,318
Good food for thought in this discussion.
__________________
The worst decisions are usually made in times of anger and impatience.
Chuckanut is online now   Reply With Quote
Old 12-14-2011, 06:13 PM   #18
Thinks s/he gets paid by the post
 
Join Date: Mar 2004
Posts: 1,988
Thanks, everyone for the explanations. Logically, it makes sense to convert as I've got 10 years before RMDs.

I am reading about conversions on Fairmark's site. I will also rerun my calculations.

omni
__________________
omni550 is offline   Reply With Quote
Old 12-15-2011, 07:14 AM   #19
Dryer sheet aficionado
sailfish's Avatar
 
Join Date: Jun 2008
Posts: 49
I originally started this thread, and it appears that it is really a question of doing the math. If RMD's don't push total income over the 15% bracket then stay the course. I just can't get myself to pay tax now to put in a ROTH. If the Bush tax cuts don't get continued then it will cost more later . It was great getting all the responses as this issue probably affects a lot of us boomers.
Thanks, Joe
__________________
sailfish is offline   Reply With Quote
Old 12-15-2011, 07:54 AM   #20
Thinks s/he gets paid by the post
teejayevans's Avatar
 
Join Date: Sep 2006
Posts: 1,219
Given you don't know what the future holds, I would try to be tax diverse, ideally 1/3 taxable, 1/3 IRA, 1/3 Roth. This way you'll have flexibility.
TJ
__________________

__________________
teejayevans is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Another HSA question - order of contributions question NYCO FIRE and Money 4 11-14-2011 08:49 PM
Early withdrawal changes Chuckanut FIRE and Money 0 10-08-2011 01:11 PM
New article: 4 Percent Withdrawal Rate May Be Too High for Today's Retirees smjsl FIRE and Money 28 10-07-2011 09:30 AM
Question re: best way to invest "extra cash" Lisa99 FIRE and Money 21 08-10-2011 03:25 PM
Early withdrawal rules question bizlady FIRE and Money 2 06-23-2011 02:09 PM

 

 
All times are GMT -6. The time now is 01:01 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.