Your advice on a withdrawal strategy

[Finance Dave]

Originally Posted by 2B

FD,

Reading your initial post looks like almost all of your money is in sheltered accounts. If so, you will have a hard time limiting your marginal tax rate to 15%. You might want to go and max out the 25% tax rate and convert taxable IRA money to your Roth. That will leave you with the ability to not get forced to go over the 25% bracket between SS and RMD.

I didn't see when you were planning to start SS. I tend to assume that people with assets will defer to age 70 but since your wife is older the benefit to her is less. Unfortunately, taking SS drastically increases your marginal tax rate. That's why its good to move money into your Roth for use after you start taking SS.

It's obvious the FA business pays pretty well.

2B, thanks for your response. Yes, the vast majority of my money is in sheltered accounts. However, the marginal rate for married-joint is 15% at $65,100...so I'm not understanding your comment about having a hard time limiting my rate to 15%. If I pull $65,100 out of my 401k...I am only paying in the 15% bracket. I can supplement this amount with other non-taxed funds such as savings, Roth IRA, etc...right?

As far as SS...I'm not certain when I'll take it...but mostly likely the wife will take it early (62), and I'll wait as long as I can. Given that women tend to live longer than men and she's pretty healthy...I think this may be our best bet...but I'll certainly run the numbers when we get closer...we're still several years away. I see your point about SS increasing our marginal bracket...so I'll have to think through that...it may mean deferring wife's SS to later as you mention.

Can I move my 401k balance into my Roth at some point? I guess I've not really thought about that...it's a large balance...so I'd have to pay taxes on it one time...doesn't feel like the right thing to do...advice?

Thanks for all the thoughts...keep 'em comin!

Dave

Edit: 2B, you mention the "FA" business...I presume that means "Financial Analysis"? Were you saying that my occupation pays well to allow me to save so much? If so, I can clarify...my wife and I both work at good-paying jobs, we are both LBYM-types of people, I am mechanically inclined to the point that I rarely hire any professionals for work around the house (I can do the "basics" of plumbing, electrical, used to be an auto mechanic, fix my own lawnmowers, finishing our basement myself, am a hobbyist woodworker, etc.) and we do not have children. Combining these facts allows us to save more than most people.

On the downside, we have some moderately expensive hobbies. We both like to travel, my woodworking is expensive ($25,000 worth of woodworking tools in my basement), and I collect musclecars (have two of them...total value about $100,000). Fortunately I can afford to pursue the hobbies...and if something really bad were to happen financially...it would be much easier to drop a hobby as opposed to not eating...we are very fortunate in that regard.

[Finance Dave]

Originally Posted by jIMOh

YES, this is what I was referring to as a third scenario. I think it was mentioned by another poster too.

I guessed that, but that option needed alknowledgement.
I would stop the taxable 401k contributions and at least divert those funds to a taxable account option. This will give you more flexibility (get the taxable account balance higher so you have options).

I understand saving on taxes now- you are in 25 or 28% bracket, I believe. If the 401k is not lowering your current tax bracket, I would seriously look at getting taxable account balance higher.

Thanks jIMOh, but I don't understand how diverting the after-tax money will give me any more options. I've already verified with my employer than I can withdraw any after-tax funds at any time I want without penalty. perhaps you mean more investment options...and if that's what you mean I understand fully.

Yes, we are in the 28% bracket...and given where our country is headed, I would say I'll be in a 31-35% bracket in about 3-4 years (I think Congress will raise rates...especially for high-income individuals).

[jIMOh]

Originally Posted by Finance Dave

Thanks jIMOh, but I don't understand how diverting the after-tax money will give me any more options. I've already verified with my employer than I can withdraw any after-tax funds at any time I want without penalty. perhaps you mean more investment options...and if that's what you mean I understand fully.

Yes, we are in the 28% bracket...and given where our country is headed, I would say I'll be in a 31-35% bracket in about 3-4 years (I think Congress will raise rates...especially for high-income individuals).

The after tax money will be withdrawn from 401k at 25%, 28% or 33% marginal rate.

That same money in a taxable account would be taxed at 5% or 15%. So why put money into a 401k which does NOT save you taxes now? I would argue contribute this money to a taxable investment, and then realize you have a more complex withdraw plan (taxable accounts, tax deferred accounts, tax free accounts).

IMO the goal would be to have as much in tax free as possible (Roth) and then have as much in taxable as possible. This is to minimize the tax bill and allow you to keep more of what you have worked hard to save.

[2B]

Originally Posted by Finance Dave

2B, thanks for your response. Yes, the vast majority of my money is in sheltered accounts. However, the marginal rate for married-joint is 15% at $65,100...so I'm not understanding your comment about having a hard time limiting my rate to 15%. If I pull $65,100 out of my 401k...I am only paying in the 15% bracket. I can supplement this amount with other non-taxed funds such as savings, Roth IRA, etc...right?

You said you needed about $85K to live on. Add to that the money needed to pay the taxes on it and I doubt you can supplement the $65,100 with $30,000 or so from after tax money for very long. I might have missed something. If I did you can stay at the 15% marginal rate.

Once you cross over you might as well maximize the 25% bracket to get as much money transferred as possible to avoid the higher tax rate when you start SS. Retiring at 56 gives you a few years to move money no matter when you start SS.

I was just giving you a non-nasty (I thought) ribbing on your income. I'll make my financial post when I feel closer to the moment and give everyone a shot at me. Our family income isn't much different than yours.

[Finance Dave]

Originally Posted by jIMOh

The after tax money will be withdrawn from 401k at 25%, 28% or 33% marginal rate.

That same money in a taxable account would be taxed at 5% or 15%. So why put money into a 401k which does NOT save you taxes now? I would argue contribute this money to a taxable investment, and then realize you have a more complex withdraw plan (taxable accounts, tax deferred accounts, tax free accounts).

IMO the goal would be to have as much in tax free as possible (Roth) and then have as much in taxable as possible. This is to minimize the tax bill and allow you to keep more of what you have worked hard to save.

We must be talking past each other....the after-tax money will be withdrawn at zero percent...I already paid taxes on it.

[Finance Dave]

Originally Posted by 2B

You said you needed about $85K to live on. Add to that the money needed to pay the taxes on it and I doubt you can supplement the $65,100 with $30,000 or so from after tax money for very long. I might have missed something. If I did you can stay at the 15% marginal rate.

Once you cross over you might as well maximize the 25% bracket to get as much money transferred as possible to avoid the higher tax rate when you start SS. Retiring at 56 gives you a few years to move money no matter when you start SS.

I was just giving you a non-nasty (I thought) ribbing on your income. I'll make my financial post when I feel closer to the moment and give everyone a shot at me. Our family income isn't much different than yours.

Thanks 2B, good points. I didn't take your ribbing as nasty...just wasn't sure what you meant by FA...I work in corporate finance, I'm not a financial advisor.....but perhaps you meant financial analysis...which is a portion of my job.

[2B]

Originally Posted by Finance Dave

Thanks 2B, good points. I didn't take your ribbing as nasty...just wasn't sure what you meant by FA...I work in corporate finance, I'm not a financial advisor.....but perhaps you meant financial analysis...which is a portion of my job.

I thought you were a financial advisor. I must have misread your meaning in some previous posts.

[jIMOh]

Originally Posted by Finance Dave

We must be talking past each other....the after-tax money will be withdrawn at zero percent...I already paid taxes on it.

Are you sure?? My understanding is you get tax free compounding, but would pay taxes on withdraws at ordinary income rates.

[Finance Dave]

Originally Posted by jIMOh

Are you sure?? My understanding is you get tax free compounding, but would pay taxes on withdraws at ordinary income rates.

Yes I'm sure. I'd be really if they tried to tax it a second time....given that I'm in the 28% bracket, that would be 56%.