Withdrawals before RMDs?

[explanade]

The calculation is simple for us. We have no wage, we have a lot of years before SS, and we have significant savings outside of tax deferred plans (IRA, 401k). So, it is Roth conversions right now, not withdrawals.

For those with very little in non-deferred savings, I think withdrawals make a ton of sense.

If you anticipate a significant jump in income once you start getting SS and if you still have RMDs you will have to take, wouldn't that be an argument for selling some taxable assets and pay cap gains on some of them before your annual income goes up with SS and RMDs later?

 

[JoeWras]

If you anticipate a significant jump in income once you start getting SS and if you still have RMDs you will have to take, wouldn't that be an argument for selling some taxable assets and pay cap gains on some of them before your annual income goes up with SS and RMDs later?

Ah, yes, a very interesting part of the calculus, no?

Due to the "incredible" 2022 we had, I actually did TLH on my equity assets. We do have some very old (nice gain) taxable equities and those mostly go to charities right now.

A lot of our taxable is not locked in gains, but rather instruments like treasuries. So, no worry there. You are right, we also sell off gains in some years and do cap gain harvesting. It gets a little complicated since my state doesn't tax gains as nicely as the Fed. My state is lowering their tax rates over the next few years, so we are deferring some gain harvesting until a bit later.

Complicated.

 

[Jimonlimon]

Mostly in response to the original post- Our need for income from 401k is primarily to bridge from retirement (when I start drawing a pension) to beginning our Social Security (SS) draw.

My plan is to deplete around half of my 401k between age 58 and starting SS at age 67 or so. My pension and both SS combined will more than replace our current income so we won't need the 401k after then for everyday expenses.

We will likely continue to pull out of the 401k once we start SS so we have taxes-paid assets that are readily available for big-ticket expenses, gifts, LTC, etc. I'm not worried about the RMD requirements as that's probably about what we would be doing anyhow. We will mostly stay below the IRMAA surcharges. Our state income tax rates are high; there's some chance we would move elsewhere so it doesn't make sense for us to do a Roth conversion or pull excess from the 401k for the first several years of retirement.

We're "lucky" in that our assets and future income will allow a comfortable retirement but well under any inheritance or lifetime gift tax limits.

 

[audreyh1]

If you anticipate a significant jump in income once you start getting SS and if you still have RMDs you will have to take, wouldn't that be an argument for selling some taxable assets and pay cap gains on some of them before your annual income goes up with SS and RMDs later?

Not really because you can leave unrealized gains as long as you want, and ultimately your heirs will get a stepped up basis.

Now if you have funds that pay out a bunch of cap gains distributions annually more than you need, it’s a good argument to switch to more tax efficient funds like index funds or ETFs.

 

[explanade]

But if you're not interested in leaving a big inheritance?

 

[JoeWras]

But if you're not interested in leaving a big inheritance?

That's why all our charity is through most appreciated assets.

 

[Jimonlimon]

If you anticipate a significant jump in income once you start getting SS and if you still have RMDs you will have to take, wouldn't that be an argument for selling some taxable assets and pay cap gains on some of them before your annual income goes up with SS and RMDs later?

In my case, as long as we're in California, Social Security will be taxed at 0% state, 85% at 22% Federal. Our top marginal rate for 401k distributions will be 8 or 9.3% state and 22% Federal. So for us we can have a much higher total income for the same taxes after we start SS.

 

[Koolau]

Yes, I've done ROTH conversions AND straight withdrawals from 401(k) or tIRA to live on. I'm trying to "titrate" the draw to avoid pitfalls like IRRMA, etc. now and in the future. RMDs take control away from you. All you can do to limit RMDs is withdraw some early and either spend or repurpose after paying the taxes. YMMV

 

[explanade]

Well I didn't do enough research on RMDs and all the associated issues.

Now, I'm more inclined to take SS later than I otherwise was, to do withdrawals and conversions now.

 

[Gary from Tampa]

77 YO now. Retired at 62 and started taking SS and doing ROTH conversions. We lived on SS, some taxable account withdrawals and some IRA withdrawals that kept our taxable income below the top of the 15% tax bracket. Converted enough each year to get to the top of the 15% tax bracket. Completed last ROTH conversion when we were 70. During that time we converted about $300,000 and paid about $45,000 tax from taxable account. Now no taxable accounts, withdraw only enough from IRA (it meets our RMD requirement) to get to the top of the 0 tax bracket. Withdraw any more we need from ROTH. Today we live in Florida on about $75,000 tax free dollars a year.

 

[Finance Dave]

I'm 61, wife is 64. We have withdrawn from her TIRA a few times. Each person's situation is different. We are retired but have had rental income up to this point (selling off the rentals now), and the rental income covered about 60% of our spending needs. But rather than just taking enough out of the TIRA to meet spending, we take out just enough to stay under a higher tax bracket even if we don't need it. So far those "extra" amounts have not been enough to warrant a Roth conversion, but yes we are looking at that. For 2022 we had a very unusual year...we sold 4 rental properties due to the high market and therefore we will have a very large tax bill...but it was still the right thing to do for a lot of reasons I won't go into.

In general our plan is to take from TIRAs just up to a tax bracket we're comfortable with, do Roth conversions on any "excess" we don't need, and continue building the Roth as best we can.

Now that we've sold most rentals (1 left), our income will be almost exclusively from IRA withdrawals. If we need a lot in a given year (for example, let's say I want to buy a $125,000 sports car...which is in our plan), then we can take from TIRAs up to a comfortable tax bracket, and supplement by taking from the Roth to avoid tipping over into the next tax bracket.

One other thing we have to be careful about is changing/losing the health care subsidy we get from the ACA by having our MAGI income be too high. Obviously we failed on that in 2022 due to selling all the rentals...but we knew that in advance and decided to do it anyway...the prices we got for the rentals was soooooooo high that it made it worthwhile in spite of the tax bill.

 

[Gary from Tampa]

Understanding the tax brackets and the levels that trigger penalties should help you develop a good plan. After we retired it because our income became more consistent it was easier for us to develop our plan.

 

[dheb]

Instead of doing Roth conversions, I'm planning to pull from my traditional IRA just up to the standard deduction each year starting at 59 1/2; the rest of my income will come from long term cap gains and I'll stay in the 0% bracket on those. I should be able to use almost all of my traditional IRA over a decade+ without owing federal tax that way.

 

[Cerys]

My late husband and I owned a business. It was highly tax advantageous to us to put as much as we could into our SEP IRA, and not even mess with a Roth.

We started the business before there was such a thing anyway. It’s 59 1/2 he died from a glioblastoma brain tumor, and I sure as heck didn’t wanna go back to work, and didn’t really need to. But to be honest, we were so intent on saving for retirement, my cash funds were low. So considering what my plans were, which was to sell my house and buy a new house across the country, and frankly I wanted to buy the new house first, and literally we were retirement rich in cash poor somewhat by design, I started taking distributions monthly from my IRA.

If you’re wondering why I made that decision to be cash poor and retirement heavy, it was because no matter how much money I saved in a year, it all went to the SEP IRA, and our IRAs. It was kind of magical. Not.

So my option was really to either take the retirement benefits, or go back to work. And considering I had enough money that I know I will never ever spend it all, I chose to start taking it. The only formula I am following is that I’ll take the high end so I still get my immediate tax rebates on my health insurance so I don’t have to spend $1800 a month on health insurance I only have to spend 200.

 

[schellem]

The Tax Planning chapter of Wade Pfau's book titled 'Retirement Planning Guidebook' covers this scenario in decent detail for a single person. He compares the traditional order of spending plan of taxable, tax deferred to tax free to that of spending some from the IRA at the beginning.
He demonstrates that spending some from the IRA\401K at the start can add years to the portfolio longevity.

 

[NW-Bound]

I started to draw from IRA/401k as soon as we hit 59-1/2. These accounts were growing unmolested, while the after-tax accounts were getting skinnier. I wanted to even out the taxes and paid some every year, rather than a big chunk later.

In 2022, decided the right thing to do is to do Roth conversion to the top of the 22% MFJ Fed bracket, after realizing that SS+RMD means we will never be below 22%, and are likely to get to the higher bracket.

Might as well pay now instead of paying more later. Just pay the tax to get it over with, then that money is all mine.

PS. Have not figured it all out, but I don't have many years left to do enough Roth conversion till SS+RMD. I should be able to do enough to reduce the IRA/401k so that SS+RMD will not push us to higher than 22%. If it happens, then it means the IRA/401k grows faster than I can deplete it, and that's a nice problem to have.

PPS. Just now looked at the tax brackets again. Beyond 22% is the 24% bracket. Only 2% more. And the 24% bracket is quite wide. It takes significantly more income to get to the 32% bracket. Would I complain if our IRA/401k somehow grew so that RMD from them put us in the 32%? Only in my wildest dream.

Who thought of these brackets anyway? Why a big step from 12% to 22%, then a small step from 22% to 24%, then a big jump to 32%? What is the gummint trying to do? It looks to me they were targeting certain demographics.

 

[Romer]

With the new law, I won't have to take RMDs until I am 75 (61 now)

I calculated an average YoY 6% growth would move us into the 28% Tax Bracket when RMDs start. I am not planning on 6% growth, I use 2.5% to be conservative. Making money and paying more as some say not a bad problem to have. However, with a long runway ahead I can pay less tax now and more effectively manage the money (in my opinion), especially between now and Jan 2026.

What I am doing is Roth Conversions until the tax law changes Jan 2026 and then will evaluate from there based on growth, when I decide to take SS (65 or 67) and where I sit in the lower tax brackets

At that time I will have about 50% in Roth and 50% in IRA. The Roth I will allow to grow untouched until the IRA is gone. I will look at ROI, where I am to the tax brackets and evaluate smaller Roth Conversions.

Unless my investments grow like it did a few years ago, We won't have an issue with RMDs impacting IRMAAs and higher tax brackets. My biggest concern is if I pass first and my wife has to deal with single tax rates and IRMAA levels. The single tax bracket scenario is what will drive what I do after Jan 2026. This year went right up to the 24% bracket top (28% in 2026) and in 2024/25 will go to the top of 22% bracket , really IRMAA level of $194K since those year MAGI will impact IRMAA

It is looking like now with SS and my pension, I can continue to do up to $50K Roth conversions 2026 on if I chose to without impacting IRMAA while still having a nice yearly cash buffer for the unexpected or the blow the dough impulse . What I actually do is TBD until I get there.

Having no tIRA and everything in a Roth would be awesome from a tax perspective for both the married and the single tax rate scenario before we hit the RMD age. No being 14 years away provides a lot of time to provide a slower lower level path (post 2026)

Everyone has a different set of goals and unique situations, but this is my plan that works for me . . . . Until it doesn't and I revector if needed.

 

[NW-Bound]

...
Having no tIRA and everything in a Roth would be awesome from a tax perspective for both the married and the single tax rate scenario before we hit the RMD age...

I made more than $800K in the past 3 years from OTM contract premium. Imagine all that gain in a Roth account, tax free!

Even in an after-tax account, the gains are all short-term gains and taxable as regular income and not getting preferable capital gain tax treatment.

 

[2retireearly]

Yes. I retired at 55. No penalty to withdraw money from 401k. I took a small amount each year, for 10 years, as also had plain old cash to live on. All was great until this last year when investments started to not be such great investments, so took soc sec instead, at 65. Who wants to remove from a losing IRA? If IRA was continuing it's 30% increase, and I took out still a small amount to not trigger big taxes, it would have still been a smart plan, to delay soc sec. But my IRA was having no gain, so happily took soc sec instead... Plan was thwarted to get large soc sec by delaying.

 

[RobbieB]

I hit up the IRA at age 60 and hit it every year for expenses.

 

[RobLJ]

I guess the calculus here is withdrawing from IRA versus contributing to Roths.

But I think for most of us (or just me), I didn't have a huge cache of cash to withdraw from in early retirement. At 60, I started to withdraw from my 403b, which was our main support, then 4 years later (this year) my wife qualified for withdrawals penalty free from her IRAs, which was a relief.
I realize there are many here who have a huge cache of cash that they have squirrelled away, but I don't think it is the norm. Withdrawing after 591/2 from IRAs or 401k/403bs is how you retire early, at least for most of us.
By the way, it has worked well--for me at least. YMMV.

I read about the Roth transfers, but frankly it just seems like a lot of trouble for a relatively small benefit.

 

[badatmath]

Well if I don't hit up the 401K before RMD I can't retire for a long time so guess which it will be!

 

[athena53]

About half my retirement funds are in a traditional IRA. I've held off withdrawing from them with two exceptions: my income in 2022 was low enough (thanks to lousy investment results) that I could do a small Roth conversion. Late in 2021 my Dad died and my share of his IRA was $80K. I'm almost 70 so I don't need to do RMDs yet but am giving away this amount and the after-tax portion of the inheritance over 10 years- partly charity, mostly to my grandchildren's 529s. Non-spousal inherited IRAs apparently have to be liquidated within 10 years and I'm choosing to do it gradually, with the bulk of it withdrawn before I have to make RMDs from my own account. It goes straight to my donor-advised fund but of course ends up in my AGI on the way.

 

[audreyh1]

About half my retirement funds are in a traditional IRA. I've held off withdrawing from them with two exceptions: my income in 2022 was low enough (thanks to lousy investment results) that I could do a small Roth conversion. Late in 2021 my Dad died and my share of his IRA was $80K. I'm almost 70 so I don't need to do RMDs yet but am giving away this amount and the after-tax portion of the inheritance over 10 years- partly charity, mostly to my grandchildren's 529s. Non-spousal inherited IRAs apparently have to be liquidated within 10 years and I'm choosing to do it gradually, with the bulk of it withdrawn before I have to make RMDs from my own account. It goes straight to my donor-advised fund but of course ends up in my AGI on the way.

Just to be clear non-spousal beneficiaries do not necessarily have to liquidate within 10 years. If a beneficiary is not more than 10 years younger than the original IRA owner or a minor child or chronically ill they are not subject to the 10 year liquidation rule.

Eligible designated beneficiaries (a surviving spouse, a minor child of the account owner, someone who is disabled or chronically ill, or a beneficiary who is not more than 10 years younger than the original IRA owner) have the opportunity to take RMD withdrawals based on their age (or the age of the original account owner, if the account owner was already taking RMD prior to death).

 

[Taxman59]

I'm doing IRA withdrawals in order to have enough income to qualify for ACA health insurance instead of MedicAID. Right now I'm maxing out the 0% tax bracket. When I go on Medicare I'll start IRA withdrawals to max the 10% or 12% tax brackets or whatever rates are in place then. For me it's not about withdrawing from IRAs prior to mandatory RMDs to spend it but to managed taxes.

I manage my ACA income to maximize the benefits (not a fan of the program, but it is the law of the land so I might as well use it). I'm using after tax $$ and some ROTH until 65 when I will switch to primarily tIRA $$.