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Withdrawals, Taxes, and Spending
Old 02-06-2012, 06:07 AM   #1
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Withdrawals, Taxes, and Spending

I am 64 and will retire in a few months. Wife is already retired. We have no mortgage, no debts, and kids have long been on their own. We pay cash for everything and have Medicare and Tricare for Life. We saved and lived on one (teacher’s) salary for the last 20 years. Last year we spent about 50k. We are somewhat frugal and don’t have many “wants” but want to travel and landscape the backyard to make this old house more pleasant during retirement years.

Now I need to figure out when to tap into our savings to be the most tax efficient. Our income base will be:
Social Security (both) 37k (cola)
Pension (wife) 12k (cola)
Pension (me) 10k (non-cola)

Investments (approximate numbers):
tIRA (me) 525k (most in TRP 2010)
tIRA (wife) 350k (Vanguard Wellesley)
roth IRA (me) 75k (in TRP 2010)
roth IRA (wife) 75k (in TRP 2015)
Various stocks 475k
Cash 250k

I have been simplifying our investments to make it easy for my wife to deal with when I am no longer able to make rational decisions or for some other more permanent reason. I figure we will first use the dividends and interest each year from stocks and/or cash since we will have to pay taxes on those anyway. Last year that came to 20k.

If we use roth IRA and cash to add to our income base then tax bracket shouldn’t change but by 70 ˝ when we have to withdraw from the tIRA (maybe about 30-40k) we will probably be in a higher tax bracket. But should I leave cash and roth alone and withdraw from the tIRA up to the top of my low tax bracket now to try and keep taxes down at 70˝?

How much could I withdraw from the tIRA each year until 70 ˝ without increasing my tax bracket? How would you withdraw from the buckets to keep the taxes to a minimum? Will any method make a difference? The government claimed enough of my earnings. Being a responsible citizen all these years just meant I paid standard deduction and therefore maximum taxes on my earnings. No loop holes available for me.

I sure could use some help. Saving was easy but I forgot how to spend money without feeling frivolous or ripped off. I even feel uneasy going to McD without a coupon!

Cheers!
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Old 02-06-2012, 06:39 AM   #2
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Since you look heavy in the tIRAs and light in the ROTHs, over the next 5 years, you might want to move / convert to ROTH as much as possible without incurring an inordinate tax burden. With 22K in pensions, 20K in financial income and perhaps an annual drawdown of 20K from cash it appears you would have a relatively low taxable income for the next 5 years; thereby making some conversions from TIRAs to ROTHs feasible from a tax liability standpoint. You could use TurboTax or HR Block's AtHome tax software to do some what-if analysis regarding the tax impact of conversions to ROTH.
I would defer withdrawals from ROTH accounts until the bitter end.
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Old 02-06-2012, 06:47 AM   #3
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It seems you have your budget covered with income and dividends, so you don't need to draw on the tIRA, but you can convert some to a Roth, as long as the marginal tax rate is not too high. TT desktop will help this simulation. The way to approaching would be to estimate your tax based on your current income plus RMD, see what your marginal rate is on the IRA, then determine how much you can convert to Roth now before reaching that same marginal rate.

You also have a fair amount of cash, probably more that you need to cover emergencies and budget.
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Old 02-06-2012, 06:49 AM   #4
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Old 02-06-2012, 07:02 AM   #5
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My situation is similiar, I have enough to pay my budgeted items from pensions annd SS (once I start my SS draw). However, much of my retirement savings is in pre-tax funds (401k and TIRA). I plan to start a draw from my tax deferred accounts once I reach 59.5 to spread out the draws over time. If I live to say 90, and don't draw from IRAs till I must at 70.5, I'll have 20 years to spread the draws. If I start at 59.5, I'll have 30 years to spread the draws, or my draws would be 33% less. Gotta add back in gains that will add to the account over the 20 or 30 years, but seems to me that if I can have the flexibility to take less per year over more years, that should result in lower tax rate. If I draw from $1M over 20 years, that would add $50K/yr over 30 years, it would add $33K/yr. Lower annual income, lower tax rate, no?
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Old 02-06-2012, 07:46 AM   #6
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If your typical spending was $50K your only chore in retirement will be figuring out what new stuff to do. Your "guaranteed" income matches your expenses and your taxes will be in the basement. That $1.75M will provide something in the neighborhood of $50-70K/yr pure fun (-taxes) if you could figure out how to spend it.

Congratulations and why did you wait so long?
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Old 02-06-2012, 08:14 AM   #7
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Quote:
Originally Posted by Badger View Post
I am 64 and will retire in a few months. Wife is already retired. We have no mortgage, no debts, and kids have long been on their own. We pay cash for everything and have Medicare and Tricare for Life. We saved and lived on one (teacher’s) salary for the last 20 years. Last year we spent about 50k. We are somewhat frugal and don’t have many “wants” but want to travel and landscape the backyard to make this old house more pleasant during retirement years.

Now I need to figure out when to tap into our savings to be the most tax efficient. Our income base will be:
Social Security (both) 37k (cola)
Pension (wife) 12k (cola)
Pension (me) 10k (non-cola)

Investments (approximate numbers):
tIRA (me) 525k (most in TRP 2010)
tIRA (wife) 350k (Vanguard Wellesley)
roth IRA (me) 75k (in TRP 2010)
roth IRA (wife) 75k (in TRP 2015)
Various stocks 475k
Cash 250k

I have been simplifying our investments to make it easy for my wife to deal with when I am no longer able to make rational decisions or for some other more permanent reason. I figure we will first use the dividends and interest each year from stocks and/or cash since we will have to pay taxes on those anyway. Last year that came to 20k.

If we use roth IRA and cash to add to our income base then tax bracket shouldn’t change but by 70 ˝ when we have to withdraw from the tIRA (maybe about 30-40k) we will probably be in a higher tax bracket. But should I leave cash and roth alone and withdraw from the tIRA up to the top of my low tax bracket now to try and keep taxes down at 70˝?

How much could I withdraw from the tIRA each year until 70 ˝ without increasing my tax bracket? How would you withdraw from the buckets to keep the taxes to a minimum? Will any method make a difference? The government claimed enough of my earnings. Being a responsible citizen all these years just meant I paid standard deduction and therefore maximum taxes on my earnings. No loop holes available for me.

I sure could use some help. Saving was easy but I forgot how to spend money without feeling frivolous or ripped off. I even feel uneasy going to McD without a coupon!

Cheers!
You guys are the poster children for thirft and savings. Remarkable what you achieved on a single salary and living within your means. Enjoy your travels, and the remodel of the backyard. Well deserved.
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Old 02-06-2012, 09:13 AM   #8
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Sounds like you can't possibly run out of money unless you suddenly decide to go crazy. You're probably in better shape than 99.999999999999999% of all Americans.
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Old 02-06-2012, 10:14 AM   #9
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Originally Posted by donheff View Post
If your typical spending was $50K your only chore in retirement will be figuring out what new stuff to do. Your "guaranteed" income matches your expenses and your taxes will be in the basement. That $1.75M will provide something in the neighborhood of $50-70K/yr pure fun (-taxes) if you could figure out how to spend it.

Congratulations ...
+1

We were in a similar (not quite as good) situation. The only tax problem is that RMD's would eventually put us into a 25% marginal bracket.

The standard approach is to "fill up your 15% bracket" every year so you at least save the 10% difference.

Here's a crude rule: The top of the 15% bracket in 2011 is $69,000. The standard deduction plus personal exemptions will be about $19,000, and 15% of your SS isn't taxed. So we cross over from the 15% to 25% bracket at roughly $95,000 of before tax income. I think of that as a goal. We can get there in December if necessary by converting some tIRA to Roth if we haven't had other reasons to generate taxable income during the year. There is no penalty for going over (we just pay 25% now instead of 25% later, and extra Roth may give us flexibility down the road), so I don't have to cut it real fine.

That's about as far as I go with tax planning, too many unknowns down the road for me to do much more.

Of course, TT or some other system is better at making the fine decisions, but this at least provides a general idea.
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Old 02-06-2012, 11:38 AM   #10
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The Roth conversion up to the limit of your tax bracket is the major tax move you can make in this position.

The related move is to use those Roth funds later to maintain your low tax bracket as long as possible. Always use TIRA/taxable withdrawals to fill the lower tax bracket and then use Roth withdrawals if necessary to cover any additional spending needs. TIRA RMD's may end up pushing you above the lower tax bracket, but hopefully late in retirement.

The success of these strategies will depend on your specific tax circumstances, so it is tough for us to give you more detailed advice.
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Old 02-06-2012, 11:54 AM   #11
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Badger has made the same mistakes that many of us here on the forum have made. Worked too hard, saved too much and waited too long to retire. We should take money out of tIRAs and other tax deferred plans in an orderly fashion between now and age 70.5 or we will be faced with too much income and paying taxes at a higher rate. Independent in his/her post very succintly describes the method to decide how much to take out. The one thing that has not been mentioned in this thread is the possibility of tax increases in the future. More reason, IMO to take money out now. Oh, and BTW we should spend more money to help the economy.
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Old 02-06-2012, 06:04 PM   #12
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Old 02-06-2012, 08:08 PM   #13
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Sorry, can't help you with any advice about your financial question. But I wish you all the best in your travel and landscaping endeavors. It sounds like great fun.
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Old 02-06-2012, 11:20 PM   #14
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Thank you all for the responses. I would have retired sooner but I have had 3 major spine surgeries that have only been partially successful and I thought it best to take advantage of work place medical insurance. I also enjoy my job teaching Anatomy & Physiology to college students preparing for medical careers. There has been a great deal of satifaction over the years seeing so many of them become successful doctors, nurses, physical therapist, etc. I even had a few of my former students taking care of me while in the hospital. My stay was less stressful knowing I was being properly looked after.

It appears that my best plan during retirement is to move funds in my tIRA to a roth IRA up to the limit of my tax bracket. It doesn't appear that I can do much more than that.
Looks like my wife will get the hot tub and a landscaped backyard with a pergola she has been wanting and we will start planning to travel more than we expected. What ever she wants since we would never be in this financial situation if it we didn't work together to make it happen. In all our years together we have never argued about money. I guess I have been pretty lucky through the years.
Thanks again.

Cheers!
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Old 02-07-2012, 05:24 AM   #15
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It appears that my best plan during retirement is to move funds in my tIRA to a roth IRA up to the limit of my tax bracket. It doesn't appear that I can do much more than that.
Looks like my wife will get the hot tub and a landscaped backyard with a pergola she has been wanting and we will start planning to travel more than we expected. What ever she wants since we would never be in this financial situation if it we didn't work together to make it happen. In all our years together we have never argued about money. I guess I have been pretty lucky through the years.
Thanks again.

Cheers!
Yes, convert the tIRA to Roth a little bit each year, buy things for the house that you and your wife want, and travel sounds like a very good plan to me. It sounds like you were fortunate and also had the good sense to make some smart choices and save. Congratulations!
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Old 02-07-2012, 05:26 AM   #16
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Sounds like you can't possibly run out of money unless you suddenly decide to go crazy. You're probably in better shape than 99.999999999999999% of all Americans.
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