Withdrawal Strategy Help Requested

[Dtail]

That's a simple formula to follow!


I have the ability to keep my income low for at least the next few years by using my taxable account. I will crunch the numbers as many have suggested but I'd love to find a hybrid solution where I can do some conversions and also get a decent health insurance subsidy. We budgeted for a monthly health insurance bill of $1,500 but it shouldn't be anywhere near that high with any meaningful subsidy.

Yep, with meaningful MAGI management of income, you should not be near 1,500 monthly.
I stayed in the 150% of FPL for a Single filing status (Fiance already taking SS) and the premium is 286 monthly with no deductible and 2,350 max OOP. This is my last year using the ACA and for my 8 years using it in FLA, the rates have ranged from 67 to 286.

 

[Rianne]

Also check out https://www.irscalculators.com/tax-calculator to do some of your own tax hypothetical calculations.

When I enter $60K in
https://www.irscalculators.com/tax-calculator
it always taxes IL for pension or IRA w/d. IL does not tax retirement income. I wish this form would separate different types of income.

 

[sakowitzm]

Couple of late thoughts... and I admit to not thoroughly reading all of the posts. With regard to conversions - looking at your investments and income needs, it seems quite likely that some day, relatively soon, you are ALWAYS going to be in the 22%++ tax bracket. That takes some getting used to. But if that's the case, that may give you some additional headroom to do more/larger conversions. Especially with the TCJA expiring in less than two years. Who knows what that impact will have on tax brackets.

Specifically about the conversions, I'm in favor, for two reasons that I don't see mentioned here. First, it gives you flexibility in later years. Flexibility to draw from taxable, TIRA, or Roth; to mix and match in a way that will take best advantage of future tax laws. Second reason is for your heirs. Without any conversions, they may inherit a large TIRA balance which will be taxed as regular income. And it will likely come during their peak earning years. If they inherit from a Roth, there is no tax at all. At least until/if they change the tax laws.

As a side note, and to perhaps add to the complexity of all of this.... if you never contributed to a TIRA or converted to a Roth, and ALL of your investments were in a taxable account, then your heirs would pay NOTHING on what they inherit! All of the investments would receive a stepped-up basis when the second of you passes.

 

[Time2]

I have found it helpful to withdraw my income for the next year in December of the previous year. That allows you to know what income you have (can't avoid) like dividends and interest, then you can add withdrawals from your chosen accounts to keep you in the tax bracket desired or in the ACA subsidy position you want. It may take some non taxable account withdrawals to give you the flexibility to meet the above and still have enough income to live.

I took a taxable account withdrawal our first year retired, it was about 50% LTCGs. I paid $0 tax that year, the withdrawal reset my cost basis. We only needed about 44% of the withdrawal for our spending. This gave us a hefty amount of money for future years that I could withdraw from with very low gains to bring up our income but not add a lot of taxable income.

 

[Koolau]

With as much as you have in tIRAs, I'd strongly consider Roth conversion BUT I know nothing about ACA, so play one off against the other. One thing I can tell you: Once you reach RMD age, you feel pretty "helpless" as those RMD taxes get bigger and bigger. This subject is a bit complicated, so I'd at least consider hiring a FEE-ONLY financial advisor to take you through the numbers that fit YOUR situation. $2K $3K planning fees might turn out to be well worth it - but remember "Fee Only." (Remember also: I'm just a geezer on the internet so do your own research on ALL of this as YMMV.) GOOD LUCK!

 

[connor77]

With as much as you have in tIRAs, I'd strongly consider Roth conversion BUT I know nothing about ACA, so play one off against the other. One thing I can tell you: Once you reach RMD age, you feel pretty "helpless" as those RMD taxes get bigger and bigger. This subject is a bit complicated, so I'd at least consider hiring a FEE-ONLY financial advisor to take you through the numbers that fit YOUR situation. $2K $3K planning fees might turn out to be well worth it - but remember "Fee Only." (Remember also: I'm just a geezer on the internet so do your own research on ALL of this as YMMV.) GOOD LUCK!

Thanks Koolau! I've read a lot of your posts and have definitely benefited from them so I'll take your geezer advice any day!

 

[orbops]

I'm 57 and she is 59.

Here are our details:
tIRA $1,286,000 (45% ETFs 55% brokered CDs)

Wife's tIRA $ 895,000 (45% ETFs 55% brokered CDs)
Taxable Brokerage Account $826,000 (50% ETFs 50% brokered CDs)
Wife's Roth $50,000 100% ETF

Checking Acct $100,000
I Bonds $20,000

My wife plans to take SS at 62 or 63 and I will take it at 67. We have no debt, just "regular" bills. We'd like to have $11,500 per month to take care of essential and discretionary as well as taxes.

I was hoping to stay in the 12% tax bracket but I don't think this is likely.
We will need health insurance and will likely get a plan from the marketplace (ACA).

My questions are: Should I look into doing any Roth conversions? If yes, how much per year? What's the best way to withdraw from all of our accounts to minimize our tax liability? Should we only hold equity ETFs in our brokerage account or is a combination of ETFs, CDs and CEFs okay?

Your situation is very similar to my situation. I'm 57, and my wife is 61. Our account balances are also similar, ($3.6M vs your $3.17M and my wife will take SS at 67 while I'll take it at 70. We take out about $75K/year and stay within the 12% tax bracket to keep our Marketplace monthly premium at $50. (Once you get over $55K in AGI, the Marketplace premiums really start to increase).

We sold our I-bonds this year since Fidelity sweep pays better interest. We keep about only $5-10K in our checking account to take advantage of Fidelity's sweep account earning 5% annually.

Our strategy is to take all the money from taxable brokerage account until it is depleted, and then start taking distributions from my tIRA, and lastly from our Roth IRAs.

For our tIRA, I'm trying to convert some into T-bills or CDs and then convert the same amount in our Roth to ETFs/mutual funds. I want to try to increase the CD/T-bill holdings in tIRA, while increasing the ETF/mutual funds in our Roth.

I take a Roth conversion each December of about $30-40K. With that yearly conversion and assume the portfolio doubles in 10 years, I estimate that our RMD will start at around $25K/year when I'm 75.

With our brokerage account, 75% is in mutual funds and AMZN stock, so I won't pay any taxes on capital gains but it will contribute to AGI. I am trying to put the rest into a sweep or T-bill or CD that pays the 5% annual. The reason is that I want to minimize any dividends that are treated as ordinary income.

You might want to consider having your wife delay SS until she is 67, so that for 8 years, you can make a larger Roth conversion since SS counts as ordinary income.

 

[pb4uski]

^^^ Those numbers don't make sense to me. If you have $3.6m and it is yielding 5% then the annual growth is $180k, so your $75k of withdrawals and $30-40k of Roth conversions are not even close to covering the growth so I think your RMDs will be a lot, lot more than $25k.

What am I missing,?

 

[orbops]

^^^ Those numbers don't make sense to me. If you have $3.6m and it is yielding 5% then the annual growth is $180k, so your $75k of withdrawals and $30-40k of Roth conversions are not even close to covering the growth so I think your RMDs will be a lot, lot more than $25k.

What am I missing,?

I'm starting the RMD at around $25K, and it increases to around $50K within 10 year, and $80K in 20 years (if I'm still alive by then). I'm also assuming a 25% increase in cost of living every 10 years.

 

[pb4uski]

I'm starting the RMD at around $25K, and it increases to around $50K within 10 year, and $80K in 20 years (if I'm still alive by then). I'm also assuming a 25% increase in cost of living every 10 years.

Doesn't make sense. Have you tried this RMD calculator?

https://www.schwab.com/ira/ira-calculators/rmd

With zero growth from here, the RMD on a $3.6m IRA would be $135k a year.

Cost of living has nothing to do with RMDs, just the beginning of year balance divided by the factor from the IRS tables.

 

[orbops]

I use my own Excel spreadsheet that calculates all my accounts year by year and uses the IRS RMD table numbers to calculate the RMD. I mention cost of living simply to say that my yearly withdrawals are increasing.

The Schwab calculator makes the basic assumption that the balance compounds year after year. Keep in mind that my numbers are taking a Roth conversion out each year, and also withdrawing all the yearly AGI from my tIRA starting in about 5 years. So I'm reducing the tIRA balance by $30-$40K now, and in 10 years I will be withdrawing close to $100K/year.

 

[Healthy Lifestyle]

I am confused trying to follow your numbers unless you are making very large Roth conversions that are not mentioned in your comments.

 

[pb4uski]

I use my own Excel spreadsheet that calculates all my accounts year by year and uses the IRS RMD table numbers to calculate the RMD. I mention cost of living simply to say that my yearly withdrawals are increasing.

The Schwab calculator makes the basic assumption that the balance compounds year after year. Keep in mind that my numbers are taking a Roth conversion out each year, and also withdrawing all the yearly AGI from my tIRA starting in about 5 years. So I'm reducing the tIRA balance by $30-$40K now, and in 10 years I will be withdrawing close to $100K/year.

What are you assuming for investment returns on your tIRA?

 

[orbops]

What are you assuming for investment returns on your tIRA?

I'm assuming 5% return across all my investments.

 

[orbops]

Sorry - let me clarify some of my numbers.

The $3.6M is the overall portfolio, of which $1.3M is a tIRA - so that's the one with the RMD. The rest is spread across Roth and taxable brokerage accounts. By the time I'm 75, I'm estimating that I'll have about $500K left in the tIRA.

 

[urn2bfree]

I admit to skimming the prior responses but I did not see anyone talk about this...In your taxable accounts, if you have anything paying dividends that are being automatically reinvested, I would consider turning those OFF. You HAVE to pay the taxes on those dividends. If you were forced to sell off assets to come up with money above and beyond those dividends (AND YOU ARE IN THE HIGHER BRACKETS WHERE CAP GAINS AND DIVIDENDS ARE TAXED)you are generating another taxable event by those sales, when you might not have to if you had the dividend money already on hand.