withdrawal strategy during retirement

[simple girl]

Perhaps something in this thread will help:


Breathing down our neck

[nun]

Originally Posted by kobydog

My dilemma is how best to divvy my asset categories in taxable vs tax-deferred while withdrawing my living expenses from these accounts.

Should I have 100% of my equity allocation in taxable account, and withdraw my 3-4%/yr from that account with 1. fixed income interest (remember that I have some FI in the taxable account only because I want to maintain my overall AA) and 2. liquidated equities (to reach the 3-4% SWR that the FI interest does not cover)?

With this scenario, I would keep my Tira assets untouched (until I ran out of taxable assets and/or turned 70 and then I'd be forced to withdraw), and nearly 100% invested in FI vehicles.

I'm trying to be tax-wise. But since I expect to be in 15% marginal bracket, am I just mentally masturbating

As far as allocation is concerned I'd just apply the standard 60/40 ratio of equity to bonds and fixed income to your taxable and tax deferred accounts. You might have a bit more fixed income or a CD ladder in the taxable accounts if you need to keep a few years expenses in a safe "bucket" and a bit more equity in the tax deferred stuff as it is longer term, but in general just adopt the conventional allocation wisdom.

In the 15% tax bracket I don't think tax advantages investments are required.

Here is an piece about withdrawal strategies. I'd probably withdraw from the tax deferred accounts up to your personal exemption limit, then use your after tax accounts for the rest of my living expenses.


TIAA-CREF Institute | Tax-Efficient Sequencing of Accounts

[growing_older]

If one is going to be in the same tax bracket (i.e., say 15%) and not hit the top of it since it is indexed why move Traditional IRA money into a Roth IRA? Seems to me paying tax with todays dollars versus tomorrows dollars, if at the same rate, is not a rational thing to do.

So maybe if you are so well balanced that you can count on this, then moving money to Roth at current lower brackets is pointless for you. But for anyone who has enough money in IRAs that will be pushed into higher taxes by RMDs, getting some of the conversion done while there is still time and room in the lower brackets makes sense. For me, I'm fairly confident that tax rates will be rising from their recent lows, so even if my income (inflation adjusted) remains fairly stable, I think my tax burden will likely rise. I'd like to make use of the low rates while they are available to move pre-tax money to tax-free account (Roth) even if it means paying tax now at a low rate, that will be the same (or possibly higher) in the future. It's a near push if rates don't move, and an advantage if rates move or investment gains knock me into higher brackets later.

[tightasadrum]

Originally Posted by nun

As far as allocation is concerned I'd just apply the standard 60/40 ratio of equity to bonds and fixed income to your taxable and tax deferred accounts. You might have a bit more fixed income or a CD ladder in the taxable accounts if you need to keep a few years expenses in a safe "bucket" and a bit more equity in the tax deferred stuff as it is longer term, but in general just adopt the conventional allocation wisdom.

In the 15% tax bracket I don't think tax advantages investments are required.

Here is an piece about withdrawal strategies. I'd probably withdraw from the tax deferred accounts up to your personal exemption limit, then use your after tax accounts for the rest of my living expenses.


TIAA-CREF Institute | Tax-Efficient Sequencing of Accounts

Nun,

This is an excellent, straightforwardly worded article you have provided a link for. The only problem I struggle with on Roth conversion is how much to convert before I trigger a tax increase. I've almost always done my own taxes, but I may cave in this year for some CPA advice to find the tax trigger point.

The article also jogged my memory about another thing. For someone who finds him/herself faced with an RMD-induced tax bracket increase, there are solutions to this. One is to invest in investment real estate directly as the owner/manager of the property. From my personal experience I can assure you that there is a significant tax advantage to this, even with a positive cash flow. There is a ton of interest write-off and depreciation expense that will really work in your favor. And, as reference in the article, the asset resets when passed to your heirs, so all the deprecation expense is excused. Your heirs simply sell the property when you're gone and pocket the equity, inheritance taxes notwithstanding. Of course you must be willing to put up with the headaches that go with managing the property as many threads have previously groaned about.

[kobydog]

Tightasadrum,

If you overshoot on your Roth conversion amount (and push yourself into a higher tax bracket), you can "recharacterize" your conversion..I'm not sure how complicated this is, but here is a link:
Recharacterizing Your IRA Contribution or Roth Conversion

Also, couldn't you do the conversion after Jan 1 '08 (but before April 15, '08) so that you can calculate your taxes after Jan 1 and then decide how much you can "convert" to Roth for 2007 without moving to a higher bracket in 2007?

Comments?

kd

[kobydog]

Simplegirl and others:

The links provided by you and others were helpful. I'm planning a trip to the bookstore to browse .

I'm aware of the Lucia "buckets".

Which Armstrong book(s) would you all recommend?

What other books would you recommend?

I already have several of the Slott books, but as you know, he deals with ira issues...I'm looking for strategies for withdrawl from combination of iras AND taxable accounts.



Thanks,

kd

[tightasadrum]

kobydog,

Yes. I believe you're correct. Of course I tend to wait until the end to do and file taxes, a response to doing something I find unpleasant. Perhaps I can force myself to do it early this year.

[nun]

Originally Posted by kobydog

Simplegirl and others:

The links provided by you and others were helpful. I'm planning a trip to the bookstore to browse .

I'm aware of the Lucia "buckets".

Which Armstrong book(s) would you all recommend?

What other books would you recommend?

I already have several of the Slott books, but as you know, he deals with ira issues...I'm looking for strategies for withdrawl from combination of iras AND taxable accounts.



Thanks,

kd

So any decisions yet. One word of caution I think that when planning sometimes we try to find the "BEST" strategy for our money and I really don't think that one exists. You might try to maxzimize returns, minimize taxes and do it all presereving your captal. There are so many factors and variables involved that you can easily end up frustrated. I'd keep it fairly simple, decide on an allocation and use the after tax dollars early on in your retirement to minimize taxes and allow your tax deferred stuff to grow.

[kobydog]

Nun,

I believe you are correct. The simpler, the better.

I found this reference from Vanguard site to be VERY helpful in setting the priorities straight:
Spending From a Portfolio: Implications of a Total-Return Approach Versus an Income Approach for Taxable Investors Spending From a Portfolio: Implications of a Total-Return Approach Versus an Income Approach for Taxable Investors

Basically,

1. I will max out my tax-deferred portfolio with tax-inefficient stuff (some FI, REIT's, etc). Since I have set my AA at 55/45 (equities/FI), and my taxable portfolio is 2X the size of my ira's this will necessitate having some FI in my taxable portfolio...and I will use the income from the FI portion of this portfolio to supplement my living expenses.

2. I'll "top off" the rest of my living expenses with dividends from equities and liquidated equity holdings in the taxable account.

3. I'll convert as much tira to roth each year as possible, staying within the 15% bracket (although this will increase my "expenses" , I think it is well worth the expense).

4. Rebalance to maintain AA as needed.


The downside to this approach is if we see a number of years of market underperformance...and I'll be liquidating equities (to maintain my spending needs) at the "wrong" time

What do you guys/gals think?

kd

[baldeagle]

kobydog,

Your point 4 is to "Rebalance to maintain AA as needed". Wouldn't you use withdrawals as the first step toward rebalancing, taking funds from whichever side of your AA did best in the prior year? That's just the inverse of what you probably did when you were accumulating, right? I.e., adding funds to the down assets.

That would also address your concluding concern -- "if we see a number of years of market underperformance...and I'll be liquidating equities (to maintain my spending needs) at the "wrong" time".

In up market years, you would WD from taxable. In down years, from tax deferred.

[simple girl]

Originally Posted by kobydog

Nun,

I believe you are correct. The simpler, the better.

I found this reference from Vanguard site to be VERY helpful in setting the priorities straight:
Spending From a Portfolio: Implications of a Total-Return Approach Versus an Income Approach for Taxable Investors Spending From a Portfolio: Implications of a Total-Return Approach Versus an Income Approach for Taxable Investors

Basically,

1. I will max out my tax-deferred portfolio with tax-inefficient stuff (some FI, REIT's, etc). Since I have set my AA at 55/45 (equities/FI), and my taxable portfolio is 2X the size of my ira's this will necessitate having some FI in my taxable portfolio...and I will use the income from the FI portion of this portfolio to supplement my living expenses.

2. I'll "top off" the rest of my living expenses with dividends from equities and liquidated equity holdings in the taxable account.

3. I'll convert as much tira to roth each year as possible, staying within the 15% bracket (although this will increase my "expenses" , I think it is well worth the expense).

4. Rebalance to maintain AA as needed.


The downside to this approach is if we see a number of years of market underperformance...and I'll be liquidating equities (to maintain my spending needs) at the "wrong" time

What do you guys/gals think?

kd

KD, thanks for posting that link. Great article. We too have concerns about when you have to liquidate equities during down year(s); however, since you'd be buying similar equities in your non-taxable accounts (via selling bonds/other investments that are doing better) to keep your AA, wouldn't it all come out essentially the same?? I did read in the article that you have to be careful of "wash sales", so does this mean you have to wait 61 days to buy similar equities within your non-taxable account?

Hope this makes sense. Thanks for getting my brain thinking on this.

[kobydog]

simple girl asked:

"I did read in the article that you have to be careful of "wash sales", so does this mean you have to wait 61 days to buy similar equities within your non-taxable account?"

That is correct...you can't purchase "similar" equities 30 days before, day of or 30 days after sale of equity (30+1+30=61).

baldeagle:

I agree ...I'll use withdrawals as much as possible to maintain AA

In up years I would liquidate equities in taxable (since most of my equities will be in taxable)...in down years I would liquidate FI (in taxable as my 1st choice, then tax deferred portfolios)...all in the spirit of maintaining appropriate AA.
...all the while trying to maintain my slice and dice allocations for FI and equity assets!!

kd

[LOL!]

wash sales are trivial to avoid as has been discussed here from time to time. "Similar" investments are allowed, but not "substantially identical". So I've never had a problem avoiding wash sales. For example, sell DLS and buy GWX. Sell EEM and buy VWO. They are similar, but not substantially identical.

[kobydog]

LOL!,

What's a good one for VTI (Total US market?)...maybe Spy (S%P500), then after wash sale time has elapsed, sell SPY and repurchase VTI?? (I hate the multiple transactions, but I'm serious.)

kd

[LOL!]

How about IWV, the Russell 3000 index?

[haha]

I would say that withdrawal strategy after retirement should be similar to before retirement- just be sure to get it out in time!

Ha

[kobydog]

Although VTI is a larger US market sampling (MSCI US TSM) than Russell 3000, I really don't know if you can get away with it.

I've read that the rules are somewhat vague about what's similar and what's not.

I guess you could argue that the 2 indices are different. It sounds quite reasonable to me , but might not sound as reasonable to our pals at the IRS .

kd

[ExHermit]

A couple of quick points about which there may be some confusion earlier in this thread.

TIRA to Roth conversions must be made in the same calendar year the resulting taxable income is recognized. If you make a conversion between Jan. 1, 2007 and April 15, 2008, the conversion amount will be reported to the IRS as income for the 2008 tax year.

Wash Sale rules have no effect unless you are selling at a loss. If you have a capital gain on a sale, the IRS wants its capital gains tax and does not care at all what else you buy or when you buy it. Wash Sale rules only effect the deductibility of losses.

[SteveR]

We have a mismash of pre-tax accounts that will be used to fund our living expenses and (toys) until we start withdrawls from our IRAs. We also have a variety of MM funds and Index funds where cash is stockpiled for the next 3-5 years of expenses before I have to start selling off the after tax portfolio. After that, we should be pretty near SS age and will see how things are going on if one or both of us starts SS at age 62.

If we can meet expenses with SS and cash from after tax sales we may not have to touch all the IRAs until required. More likely we will start drining the biggest ones prior to RMDs to keep them more tax efficient. What we don't spend goes back into aftertax portfolios again and more toys.

My projections show we should have a 6 figure income during most of our retirement and still have a pile to give to kids and charity.

Asset allocation various by account. My major IRA is about 60/30/10 with the 60 divided up over several sectors. The 20 are real bonds and not funds and the 10 is cash in either CDs or MM accounts.
My after tax portfolio began as a learning experience and somehow actually increased in valve to the point that I am looking as some major LT tax amounts when I do sell some of the winners. The assets from these sales will keep us in high cotton for over 10 years. This leaves the IRAs intact to continue to grow for 10 more years if we need them to. Our expenses will be down 30% by then so we may just be OK on SS and our other cash assets.

[EngineeringMyFinances]

TIRA to Roth conversions must be made in the same calendar year the resulting taxable income is recognized. If you make a conversion between Jan. 1, 2007 and April 15, 2008, the conversion amount will be reported to the IRS as income for the 2008 tax year.

Agreed, except that I think ExHermit meant to say "between Jan 1, 2008 and April 15, 2008". And would be in the 2008 tax year for any date in 2008.

In the case of the OP, I recommend modelling your situation with a spreadsheet, accounting for taxation of SS benefits and capital gains taxes. With the model, you could decide whether it's to your advantage to delay SS while you convert. Also to determine how much of your tax-deferred funds you want to leave that way.

Without knowing the specifics of your situation, would suggest that its possibly to your advantage to:

• Leave some tax-deferred funds that way, since some income is not taxed due to deductions and exemptions. (I've seen where some people think they should convert every penny to Roth IRA before retirement, and no mention of a pension of other taxable income.)
• Delay SS benefits until you're done converting.
• Consider performing more conversion as soon as possible, as income tax rates are likely to go up.

When looking at current marginal tax brackets to decide how much to convert, don't forget about effective marginal tax brackets if SS benefits are taxed. If you're in the 15% bracket but 85 cents of SS benefits are taxed for every dollar of other income, you're really in the 1.85 x 15 % bracket or 27.25% bracket. So if that will be your situation it would be to your advantage to convert now even in to the 25% bracket.