Windfall and Withdrawals.

[marko]

This may have been covered a few times before so apologies if I'm redundant.

Assumption:
You are withdrawing $100K a year from a $2.5MM (mostly) IRA portfolio which grosses about a 6% growth rate before withdrawals.

Now, you receive an $800K after tax windfall.

Option 1: Fold the $800K into your portfolio and withdraw proportionally?

Option 2: Withdraw $100K per year from a moderately invested $800K and pay no taxes for at least 8 years, letting the IRA grow? (forget about RMDs)

Option 3: ?

 

[rodi]

I think you should probably spend some time tax modelling.

Roth conversions should be part of your plan...
Not sure how close you are to RMD age... That would make a difference.

1) sorry for your loss (assume this was an inheritance).
2) congrats on the windfall.

 

[Walt34]

Whatever you want really, there is no "should" in something like this.

I'd consider #3, a "Blow that dough" option - buy an airplane and set aside enough of the windfall to pay for say, four years of maintenance/expenses and go enjoy yourself for however long the money lasts. Or a boat, racehorse, cruise around the world, or whatever expensive item grabs your fancy. And when it's over, be sure you can say "That sure was fun!"

Or you could just do option #1 and buy some incremental splurges that you wouldn't have done otherwise.

 

[RobbieB]

I agree. Do what you want to do with it. Why ask us?

Oh, since you did, I'd blow half of it and invest the rest -

 

[SecondCor521]

Are you asking about the tax aspect, the investing aspect, the spending aspect, the windfall aspect, or something else?

 

[NW-Bound]

My option 3:

No matter what I would do with the after-tax windfall, spending or investing it, I would still withdraw from my IRA and pay taxes on it. That money is going to be taxed no matter what, and averaging out the tax burden works best for me.

Of course, you do not need that IRA withdrawal to live on. Bingo, that goes into Roth conversion. Beautiful.

 

[marko]

I think you should probably spend some time tax modelling.

Roth conversions should be part of your plan...
Not sure how close you are to RMD age... That would make a difference.

1) sorry for your loss (assume this was an inheritance).
2) congrats on the windfall.

Thank you but no, it's not an inheritance. One of the trusts set up by my great grandfather back in the 40s is being dissolved and that's my share. Well I guess it is an inheritance but he died way before I was born.

My question is simply about spending down a large after tax amount vs paying taxes from IRA withdrawals for several years.

My current IRA withdrawals exceed any future RMDs so that's less of a concern. Just feel it would be nice not to pay the Feds for awhile and have a zero income for the first time in my life.

 

[Perryinva]

Well, zero income is a waste of low tax rate headroom. Zero today, much more later.

 

[The Cosmic Avenger]

While I'm working, my rule of thumb is that 10% of a windfall is fun money, the rest goes towards retirement (option 1). If you choose option 2, what is "moderately invested"? I would think option 2 would be a CD ladder, since you're planning on using that cash for living expenses in the near future, and letting your nest egg grow....although if your expenses are $100K/yr, I'd only do that with $3-500K, not the full $800K; the rest I'd put into my overall AA.

Although honestly, at this point, we've well exceeded my expectations, so I might just buy an $800K vacation home!

 

[Badger]

I'm not a math person but it appears that your IRA portfolio is growing faster than the withdrawals so once you get to RMDs your portfolio will be larger and taxes may be even higher.
I would use the windfall for living expenses and for the taxes to convert some of the portfolio to Roth IRAs to a level just under the lowest tax rate.


Cheers!

 

[Ronstar]

My first thought was "Blow that dough". So I would blow some of it, and then use the rest like Badger above posted - pay taxes for annual Roth conversions.

 

[Perryinva]

It is a nice problem to have!

 

[RunningBum]

I'd do option 1 because I can't think of any big ticket splurge things I'd want to buy, like a boat, RV or 2nd home. If you do want something like that, now's the time.

I'm also not going to be getting that kind of windfall, otherwise I'd have been thinking more about it, while making a plan that didn't rely on it.

My question is simply about spending down a large after tax amount vs paying taxes from IRA withdrawals for several years.

My current IRA withdrawals exceed any future RMDs so that's less of a concern. Just feel it would be nice not to pay the Feds for awhile and have a zero income for the first time in my life.

That's short-sighted goal, IMO. Look at how to maximize your net worth/income over your lifetime rather than having a few zero or low tax years. You would be better to look at spreading income and taxes out more or less evenly over the years. I say "more or less" because if an even distribution puts you just over an IRMAA level, you might take more income to the top of that IRMAA level for a few of the years so that you don't hit that level in other years.

Roth conversions may help, but without knowing more details it's hard to say.

 

[Gill]

Well, zero income is a waste of low tax rate headroom. Zero today, much more later.

Agree. Zero income and zero tax is not a wise goal.
Gill

 

[marko]

I'd do option 1 because I can't think of any big ticket splurge things I'd want to buy, like a boat, RV or 2nd home. If you do want something like that, now's the time.

I'm also not going to be getting that kind of windfall, otherwise I'd have been thinking more about it, while making a plan that didn't rely on it.

That's short-sighted goal, IMO. Look at how to maximize your net worth/income over your lifetime rather than having a few zero or low tax years. You would be better to look at spreading income and taxes out more or less evenly over the years. I say "more or less" because if an even distribution puts you just over an IRMAA level, you might take more income to the top of that IRMAA level for a few of the years so that you don't hit that level in other years.

Roth conversions may help, but without knowing more details it's hard to say.

Thanks! This is helpful.

 

[audreyh1]

This may have been covered a few times before so apologies if I'm redundant.

Assumption:
You are withdrawing $100K a year from a $2.5MM (mostly) IRA portfolio which grosses about a 6% growth rate before withdrawals.

Now, you receive an $800K after tax windfall.

Option 1: Fold the $800K into your portfolio and withdraw proportionally?

Option 2: Withdraw $100K per year from a moderately invested $800K and pay no taxes for at least 8 years, letting the IRA grow? (forget about RMDs)

Option 3: ?

It’s a windfall, so you can use it however you want. It doesn’t affect the rest of your retirement plan which we assume was already on track.

If you want higher annual income for the rest of your life, then folding it or a large portion of into your portfolio would make sense.

Even if it’s part of your portfolio you can still choose not to withdraw from your IRA for a while, spending taxable funds first. Simply adjust your AA across both as needed.

If instead you prefer to “blow” some of that windfall dough, then set it aside for splurging in the short term.

It all depends on you immediate and long term goals. There is not one answer.