Withdrawal Strategy Advice

[frayne]

Thanks for all the good advice, links, etc. Playing around with a tax program the couple could actually take their SS of $22K and $18K from their traditional IRA and not have any tax liability ! The balance needed for living expenses could be taken from after tax accounts to the tune of about $5K to achieve the annual living expense of $45K.

The rub will be higher taxes due to RMDs down the road, hence the advice to convert the traditional IRA to a Roth ?

Am I on the right track and is my logic sound ?

Assuming the numbers above if money is rollover and there is a tax event does the amount rolled over add to 1040 income and if is does it would change the entire complexion of the return such as making ss taxable, etc.

Hope this all makes sense. Again thanks for the input.

[Finance Dave]

Quote:

Originally Posted by frayne I know much has been written about investing and accumulation of wealth as well as safe withdrawal rates but what is the best methodology to tap your portfolio(s). Are there any good rules of thumb for guidance ? Hypothetical Scenario Married couple both 62, collecting social security of $22K per year. Health insurance covered, house paid for, no debt, vehicles good for another ten years. No major expenditures planned for the near future. After tax portfolio approx. $300K, mix is 60/40 equities/fixed income. Traditional IRA $700K, mix is 60/40 equities/fixed income. Equities primarily in the form of low cost index mutual funds with a few stocks. Fixed income, in money markets, bond index funds, CDs, and savings account. No pension or annuities. Annual living expenses $40-45K after taxes. Assuming the same living expenses, what would be a good withdrawal strategy ? In addition have no desire to leave much on the table when we expire and for the sake of the exercise I fiqure we both have 25 year left before exiting to the netherworld. Not too concerned about the rate of withdrawal but the wisdom of tapping before or after tax accoutns and in what proportions. Appreciate any and all comments, ideas, suggestions in advance.

The "general" approach most recommend is to leave tax-deferred accounts as long as you can, although this definitely does not work well in my situation.

Part of your decision will hinge on whether you think tax rates will go up or down later in life. I think our gov't will have to raise rates in the future, so for most people I'd advise paying taxes today.

However, there is merit in the "tax diversification" philosophy, IMO, such that you make sure to have some money in both buckets. This will allow you to adapt to the tax laws in place at the time.

For our situation, we will withdraw from tax-deferred accounts up to some marginal tax-bracket breakpoint (perhaps 15%?), then take any remaining we need from taxable accounts. This is a strategy you should consider.

[Alan]

Quote:

Originally Posted by frayne Assuming the numbers above if money is rollover and there is a tax event does the amount rolled over add to 1040 income and if is does it would change the entire complexion of the return such as making ss taxable, etc.

Not sure I understand the question. Even if you are paying taxes on other income in any one year, a rollover to an IRA does not cause any additional taxable income to be added to the 1040.

[Finance Dave]

Quote:

Originally Posted by pb4uski I found this article interesting. Making Money Last in Retirement - eXtension particularly that the conventional withdrawal order of taxable/tax-deferred and tax-free might not apply where the taxable account has significant unrealized appreciation so withdrawals result in taxes.

That is a good article, but I hate it when they leave out the fact that working while taking SS does not actually reduce the amount of SS you get...it only delays it. If you take a reduction in benefits now due to working, those benefits will be added to your payments later, either once you stop working or after FRA (Full Retirement Age).

Here is the link explaining the process:
Retirement Planner: Getting Benefits While Working

"After you reach full retirement age we recalculate your benefit amount to leave out the months when we reduced or withheld benefits due to your excess earnings. "


Another article:
Top 6 Myths About Social Security Benefits

"Any benefit reductions are only deferred, and Social Security will credit those amounts to your benefits record when you reach full retirement age."


And yet another:
How Work Impacts Social Security Benefits - US News and World Report

"Benefits are not permanently withheld. The money deducted from your Social Security payments if you earn too much isn't withheld forever. Once you reach your full retirement age, your checks are recalculated to give you credit for the reduced benefits."

[mathjak107]

Quote:

Originally Posted by Finance Dave The "general" approach most recommend is to leave tax-deferred accounts as long as you can, although this definitely does not work well in my situation. Part of your decision will hinge on whether you think tax rates will go up or down later in life. I think our gov't will have to raise rates in the future, so for most people I'd advise paying taxes today. However, there is merit in the "tax diversification" philosophy, IMO, such that you make sure to have some money in both buckets. This will allow you to adapt to the tax laws in place at the time. For our situation, we will withdraw from tax-deferred accounts up to some marginal tax-bracket breakpoint (perhaps 15%?), then take any remaining we need from taxable accounts. This is a strategy you should consider.

Same here ,we will take up to 15% marginal rate or so. recent studies are starting to realize that reducing rmd's early on up to a point may be the better way to go.

[pb4uski]

Quote:

Originally Posted by frayne Thanks for all the good advice, links, etc. Playing around with a tax program the couple could actually take their SS of $22K and $18K from their traditional IRA and not have any tax liability ! The balance needed for living expenses could be taken from after tax accounts to the tune of about $5K to achieve the annual living expense of $45K. The rub will be higher taxes due to RMDs down the road, hence the advice to convert the traditional IRA to a Roth ? Am I on the right track and is my logic sound ? Assuming the numbers above if money is rollover and there is a tax event does the amount rolled over add to 1040 income and if is does it would change the entire complexion of the return such as making ss taxable, etc. Hope this all makes sense. Again thanks for the input.

Yes, the reason to reduce the traditional IRA is because beginning at age 70 1/2 there are RMDs which are taxable and you would then also have SS and the combination of the two could cause you to be in a higher tax bracket than you would be with lower RMDs.

Any amounts withdrawn from the tIRA, whether paid to you or rolled into your Roth would be taxable income. So using your example of $18k being included in taxable income and resulting in no tax, you would take the $18k in cash and reduce your draws on your taxable accounts or you could rollover the $18k and draw $23k from your taxable account that year. Either way, $18k will be included in your tax return as taxable income.