Withdrawal question.

[sailfish]

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,.

 

[pb4uski]

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.

 

[rescueme]

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...

 

[73ss454]

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.

 

[Animorph]

+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.

 

[tightasadrum]

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.

 

[omni550]

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

 

[Rich_by_the_Bay]

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.

 

[Nords]

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.

 

[ziggy29]

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.

 

[Animorph]

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.

 

[pb4uski]

In short, paying 15% today to the taxman on conversions is better than paying 25% or more later on RMDs.

 

[Finance Dave]

+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.

 

[Bikerdude]

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.

 

[ripper1]

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.

 

[73ss454]

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.

 

[Chuckanut]

Good food for thought in this discussion.

 

[omni550]

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

 

[sailfish]

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

 

[teejayevans]

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

 

[RE2Boys]

In looking at future income streams that may effect your tax bracket, such as RMDs and SS, I've also got to consider my EE and I bonds that will be coming due (no longer earning interest) when I'm in my early 70s and continueing into 80s. Some of those years I'll have thousands of dollars of interest to declare. Some were my parent's bonds where I was co-owner. Just another income stream to consider.

 

[Animorph]

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

If you expect your tax rate to be the same in retirement as it is now (on funds you may convert to a Roth), the Roth still comes out ahead with a better after-tax value held in the retirement account. Same dollar amount in the account, but none of it has to go to taxes. But surely taxes won't be going down from current rates in any foreseeable future. The tax diversity gives you a little flexibility in the future too.