Best strategy for ER withdrawals to 59 1/2?

[Rothman]

Just starting to think thru my plan, I'll have a 5-6 years to 59. Looking at tax rates I'm thinking pulling $72,500 from IRS using 72 t to avoid penalty keeps me to the limit of 15% bracket. Using a 3.5% as my withdraw rate says need $2m in IRA. Then need Roth and taxable accounts for remaining.

Am I thinking thru this correctly? Or would you increase IRA withdraw into the 25% rate range to let the Roth continue to grow tax free for use in later years?

[Surewhitey]

2 things come to mind. Standard deduction added to the $72,500. I would leave the Roth alone. We will use taxable accounts to keep us closer to the 10% rate.

[martyb]

Since I'm already 55 and I'll be retiring this year, I won't have to worry about the 55-59 1/2 tax penalty thing. I'll get my fed pension & withdraw only $10k each year from my TSP.

Wife's 52 now, and we plan for her to work until 2016, when she'll be 55. Problem there is her HR person, and apparently that person's boss, both are adamant that she will be penalized the 10% if she withdraws prior to age 59 1/2, no matter that the IRS reg says. They don't seem to read the reg the same way I do. I don't really know how to resolve this, but regardless, she will retire in the year she turns 55. At that time, we'll decide how to withdraw from her 401k.

My pension + TSP withdrawal + her income will keep us afloat, then my military reserves pension that kicks in in 2018 will float us a little higher until her age 62 in 2023, when she takes SS.

We will be staying within the 15% tax bracket for federal, and well within the 2% margin for Louisiana state tax, since neither of my pensions are taxable in that state.

[heeyy_joe]

Unless you have alternate health coverage (employer's plan), you could be paying a lot for your health care at the taxable withdrawal rate you are considering. Not that there is anything wrong with that but I hope you have considered this major potential cost into your plans.

[Rothman]

Joe, you are right I haven't considered health care, which I fear could get worse. The question I should have stated better was do others maximize per tax IRA withdrawal to 15% bracket limit then use Roth or savings or do they accept taking more pretax IRA money into the 25% bracket and let the Roth continue to grow tax free for future use? That is planning decision I am pondering.

[Animorph]

My standard plan is Roth conversions (not withdrawals) up to the top of the 15% tax bracket, then fill in with taxable and later with Roth. This transfers your taxable value into the Roth account, where you avoid taxes altogether. However, it is all a tax minimization exercise, so your specific situation will determine the best course for you.

My optimization of this is getting more sophisticated by the day as I modify my own custom software to maximize after tax retirement spending. My latest runs have several years where I'm supposed to convert just enough to avoid the AMT, which takes me to the middle of the 25% bracket. My RMD's still take me into the 25% tax bracket as well, so there's no way I can get everything out at 15% or lower. I also have to watch out for the exemption and deduction rollbacks above 300k AGI when Roth converting.

Other things to watch for:
* ACA health insurance subsidies, tuition tax credit, and other income limited cash back offers. Many depend on AGI, not tax bracket.
* 0% capital gains below the 15% tax bracket.
* Social Security timing and taxes, as well as any pensions and other income
* RMD's. Once they're under the 15% tax bracket you may be optimized well enough.
* Hidden marginal tax rate increases like exemption and deduction rollbacks, and some of the extra high-income add-on taxes. Some are dependent on taxable income, some on AGI or MAGI.
* AMT. Just another marginal tax increase. You can recover the added tax later, but you're out that amount for a year or more while it earns you $0.

However, don't despair. Much of my super optimization gains me pennies of additional spending per year. If you just convert as much as you can within the 15% tax bracket you will be 90% optimized.

[heeyy_joe]

Quote:

Originally Posted by Rothman Joe, you are right I haven't considered health care, which I fear could get worse. The question I should have stated better was do others maximize per tax IRA withdrawal to 15% bracket limit then use Roth or savings or do they accept taking more pretax IRA money into the 25% bracket and let the Roth continue to grow tax free for future use? That is planning decision I am pondering.

+1 to Animorph's post. I will be using this strategy when I ER in 2014.

[Rothman]

Thanks Animorph, always feel better others confirm same thinking.

[sengsational]

Rothman, Have you keyed your info into Retirement Calculator - Parameter Form? The idea there is to tell you how best to pull from your accounts over time to minimize taxes. I'm not sure if that tool considers Traditional > Roth conversions.

Quote:

Originally Posted by Rothman Just starting to think thru my plan, I'll have a 5-6 years to 59.

I'm in a very similar situation. I figure that I'll have a couple of years of spending out of taxable accounts where I'll try to get below 400% FPL. After that, I'm afraid I'll be out of luck. By by then, maybe the whole healthcare thing will have shaken out.

[gauss]

Quote:

Originally Posted by Animorph My standard plan is Roth conversions (not withdrawals) up to the top of the 15% tax bracket, then fill in with taxable and later with Roth. This transfers your taxable value into the Roth account, where you avoid taxes altogether. However, it is all a tax minimization exercise, so your specific situation will determine the best course for you. My optimization of this is getting more sophisticated by the day as I modify my own custom software to maximize after tax retirement spending. My latest runs have several years where I'm supposed to convert just enough to avoid the AMT, which takes me to the middle of the 25% bracket. My RMD's still take me into the 25% tax bracket as well, so there's no way I can get everything out at 15% or lower. I also have to watch out for the exemption and deduction rollbacks above 300k AGI when Roth converting. Other things to watch for: * ACA health insurance subsidies, tuition tax credit, and other income limited cash back offers. Many depend on AGI, not tax bracket. * 0% capital gains below the 15% tax bracket. * Social Security timing and taxes, as well as any pensions and other income * RMD's. Once they're under the 15% tax bracket you may be optimized well enough. * Hidden marginal tax rate increases like exemption and deduction rollbacks, and some of the extra high-income add-on taxes. Some are dependent on taxable income, some on AGI or MAGI. * AMT. Just another marginal tax increase. You can recover the added tax later, but you're out that amount for a year or more while it earns you $0. However, don't despair. Much of my super optimization gains me pennies of additional spending per year. If you just convert as much as you can within the 15% tax bracket you will be 90% optimized.

Sounds like I-Orp on steroids! Thanks for the summary.

-gauss

[audreyh1]

Quote:

Originally Posted by Animorph * AMT. Just another marginal tax increase. You can recover the added tax later, but you're out that amount for a year or more while it earns you $0.

No, I don't think you recover the added tax later unless you paid it due to exercising stock options and holding on to them.

[Animorph]

Quote:

Originally Posted by audreyh1 No, I don't think you recover the added tax later unless you paid it due to exercising stock options and holding on to them.

That was my main experience with it, but you are right:

AMT Credit

"Here's good news: a portion of your AMT liability — perhaps all — may come back to you in the form of a reduction in the tax you pay on future tax returns, or even a refund that exceeds the tax you pay in a later year, because of the AMT credit. To claim this credit you need to have paid AMT in a previous year, and it has to be the right "flavor" of AMT. Generally this means you need to have paid AMT as a result of exercising an incentive stock option, or because of certain other "timing items" such as an AMT adjustment relating to accelerated depreciation. Any AMT you pay for other reasons, such has having a large number of exemptions or a large itemized deduction for state and local taxes, will not qualify you for the credit."

[MRG]

Quote:

Originally Posted by martyb Since I'm already 55 and I'll be retiring this year, I won't have to worry about the 55-59 1/2 tax penalty thing. I'll get my fed pension & withdraw only $10k each year from my TSP. Wife's 52 now, and we plan for her to work until 2016, when she'll be 55. Problem there is her HR person, and apparently that person's boss, both are adamant that she will be penalized the 10% if she withdraws prior to age 59 1/2, no matter that the IRS reg says. They don't seem to read the reg the same way I do. I don't really know how to resolve this, but regardless, she will retire in the year she turns 55. At that time, we'll decide how to withdraw from her 401k.

You don't have to wait or feel pushed around by the HR person. That information is in the 401k documents, (THE PLAN), and by law must be provided to you. The first "retirement specialist" I spoke with Megacorp insisted the same thing but called back the next day and said they had been educated on that exception, it falls under hardship withdrawls. After age 55 and end of service.

It's the IRS that you owe your taxes to not the employer. They may withdraw those taxes, but if it's overdrawn you'll recoup.