"Best" withdrawal decisions

[kaneohe]

Long term capital gains and dividends are taxed at 5% (under present tax code) for people in 10% and 15% tax brackets.

.

Isn't the 5% now 0%?

Here's a link to an interesting (and long) article on Roth conversions.
I will confess to not going through and understanding all the examples
in detail yet. Perhaps some of you more ambitious folks can critique it
for the rest of us. It's from CCH so should be reputable.
http://tax.cchgroup.com/images/fot/JORP_10-03-07_Keebler-Bigge.pdf

 

[jIMOh]

Isn't the 5% now 0%?

Here's a link to an interesting (and long) article on Roth conversions.
I will confess to not going through and understanding all the examples
in detail yet. Perhaps some of you more ambitious folks can critique it
for the rest of us. It's from CCH so should be reputable.
http://tax.cchgroup.com/images/fot/JORP_10-03-07_Keebler-Bigge.pdf

Brief excerpt

Based on the above factors, we have been able to isolate
the following four types of Roth IRA conversions:
1) Strategic conversions—take advantage of a
client’s long-term wealth transfer objectives.
2) Tactical conversions—take advantage of shortterm
client-specifi c income tax attributes which
are set to expire.
3) Opportunistic conversions—take advantage of
short-term stock market volatility, sector rotation
and rotation in asset classes.
4) Hedging conversions—take advantage of projected
future events which will result in the client being
subject to higher tax rates within the near future.
----------------
The article states several examples, some of which helped me. There are numerous examples (I think I saw 8 examples) with income levels, tax brackets and tax return differences.​

 

[baldeagle]

This has been such a useful discussion. Thank you all for your comments and questions.

I'm going to re-post over on the Diehards forum where I know some more retired folk are and see what else emerges.

Thanks again!

 

[Lsbcal]

We've done the Roth conversion routine to the max for the past few years. However, this year we will be taking advantage of the zero tax on cap gains if in the 15% bracket. So if you happen to fall into this category of (1) you can stay in the 15% bracket, (2) you have substantial cap gains, ... then take the cap gains this year and in 2009 and 2010 before this deal expires. If anything is left in the 15% bracket after you take cap gains then do the Roth conversion.

My guess is the 2010 break might not survive if the Democrats win but 2009 is probably too close for a change since the new admin won't be in until Feb 2009.

 

[megacorp-firee]

As for the conversions- it's a tax trade off/ task risk issue. Maybe conversions now have you pay a 25% tax- what tax will be paid on RMDs?

If RMDs push income into 28% tax bracket, then paying 25% now isn't so bad.

The math doesn't work. Paying a bunch of money in taxes each year (conversions @ 25%) makes the yearly value of my portfolio progressively less then if I just wait until rmd and then pay big taxes. So the growth of the larger number and paying higher taxes at 70 1/2 is better than doing conversions now. As baldeagle's numbers also showed.

Conclusion: if you have a large taxable pension then conversions at a higher (25% rate) don't look as attractive.

 

[jIMOh]

The math doesn't work. Paying a bunch of money in taxes each year (conversions @ 25%) makes the yearly value of my portfolio progressively less then if I just wait until rmd and then pay big taxes. So the growth of the larger number and paying higher taxes at 70 1/2 is better than doing conversions now. As baldeagle's numbers also showed.

Conclusion: if you have a large taxable pension then conversions at a higher (25% rate) don't look as attractive.

If the pension+RMD puts you into 25% tax bracket, the other option would be to CAP OUT the 25% tax bracket and convert the excess.

Example- 100k of taxable income from pension and rmd. 25% bracket caps at 135k, I believe. This gives you 35k of assets to convert without incurring a higher tax liability (you would pay 25% tax on rmd the following year on this amount anyway).

Over time the capping of 25% tax bracket would drop the rmd+pension into 15% bracket range (assuming pension alone is not enough to be taxed at 25%). This would be point I would stop doing conversions in 25% bracket and look to only cap out 15% bracket (as discussed already). If the pension keeps you inside the 25% bracket by itself, capping the tax bracket still makes sense because I THINK federal taxes are lower than estate taxes in many states, and even if this is not an issue, you have at least removed the "required" part from the minimum distributions needed.

 

[TeeRuh]

Not to belittle your analysis efforts, which are very good by the way, but I seem to be reading quite a bit of angst into your posts over this dilemma. Might I suggest that you take a step back, take a deep breath, and repeat after me: "A large taxable pension is not a bad thing!"

t.r.

 

[megacorp-firee]

Not to belittle your analysis efforts, which are very good by the way, but I seem to be reading quite a bit of angst into your posts over this dilemma. Might I suggest that you take a step back, take a deep breath, and repeat after me: "A large taxable pension is not a bad thing!"

t.r.

t.r. not sure if you are directing your comments to me. If so, you're reading ability is a bit off. No angst whatsoever ... just trying to figure out (since baldeagle got me looking at it from another angle) what the best strategy would be to maximize my portfolio.
By giving more info as posts come in, you get more POVs so you can make an educated decision.
Yes you are right ... a large taxable pension is A GREAT THING.
If your comments are directed at baldeagle (since he had the good analysis), then my apologies for butting in

 

[TeeRuh]

m-f, Sort of directing my comment to the thread in general; probably would have been better to keep quiet. Saw all of the energy being expended (which is really a good thing) on this analysis and wanted to make a statement on how great a large taxable pension is. In my real life I know lots of people who spend a lot of energy complaining about paying taxes and I think they forget sometimes how many people wish they had to pay taxes!

 

[jIMOh]

m-f, Sort of directing my comment to the thread in general; probably would have been better to keep quiet. Saw all of the energy being expended (which is really a good thing) on this analysis and wanted to make a statement on how great a large taxable pension is. In my real life I know lots of people who spend a lot of energy complaining about paying taxes and I think they forget sometimes how many people wish they had to pay taxes!

Making money and not paying taxes on it has been the american way since 1776.

We even had a party in Boston harbor to celebrate this (how come that is not a national holiday?).

Americans are really englishman which did not want to pay taxes. Or that's our founding fathers anyway.

 

[ChrisC]

megacorp - I am a ways from FIRE and I haven't done super-detailed analysis, but in my reading (here, and elsewhere), and in discussions with my father (FIRED early, has a pension, has a big IRA), I think your conclusion is valid.

Of course everyone's situation is different, but with a sizeable taxable pension, you won't be able to convert much, if any, at the lower tax brackets, so your tax savings won't be very much over the years, and you'll likely still have a large IRA balance when RMDs start.

I plan to look into this more when I get closer to FIRE, but for now, I have high taxes built into my spreadsheet of future income needs.

Yeah, but if you're a Federal CSRS employee (or have a similar pension program) that offers you the ability to take taxable dollars and purchase additional pension amounts (and later rollover these so-called pension amounts to a Roth in 2010 when the income caps are removed), then you might be to avoid a lot of the pain with RMDs even with large IRA/401K balances.

 

[retire48in2018]

I'll look into this scenario as well. I am 10 years away from retirement, although I am in the 25% bracket, so I can top off now. This is not something that I considered. I wonder if some conversions done in 2010 would make it worth my while (from former employer 401ks to rollover Roths)? I'll have to set up a spreadsheet and run some numbers.

My projected mix (without any rollover) will be 60 pretax401k,30 Roth IRA, 10 reg tax.

 

[megacorp-firee]

m-f, Sort of directing my comment to the thread in general; probably would have been better to keep quiet. Saw all of the energy being expended (which is really a good thing) on this analysis and wanted to make a statement on how great a large taxable pension is. In my real life I know lots of people who spend a lot of energy complaining about paying taxes and I think they forget sometimes how many people wish they had to pay taxes!

no worries ... IMO just as it is our obligation to LBYM and save for retirement, it is our obligation NOT to squander our hard earned funds in taxes we don't have to pay. I already have charitable organizations that I give to and the FED Guvmnt is not one of them (nor should they be).

I am not prone to whining, I am on this forum to learn from others. We all can benefit from each others knowledge and experience.

 

[kaneohe]

here's an interesting Roth conversion calculator (also by CCH).
Roth IRA Conversion

 

[jIMOh]

I'll look into this scenario as well. I am 10 years away from retirement, although I am in the 25% bracket, so I can top off now. This is not something that I considered. I wonder if some conversions done in 2010 would make it worth my while (from former employer 401ks to rollover Roths)? I'll have to set up a spreadsheet and run some numbers.

My projected mix (without any rollover) will be 60 pretax401k,30 Roth IRA, 10 reg tax.

As you start forumlating the strategy to withdraw, consider this:

Roth conversions have a 5 year rule. Meaning what you convert now can be withdrawn penalty free for 5 years. Starting now might help, but you cannot convert a 401k to a Roth- if you are still working. If you do find a way to do this, please post it here.

 

[retire48in2018]

As you start forumlating the strategy to withdraw, consider this:

Roth conversions have a 5 year rule. Meaning what you convert now can be withdrawn penalty free for 5 years. Starting now might help, but you cannot convert a 401k to a Roth- if you are still working. If you do find a way to do this, please post it here.

former employer 401ks....

As far as current employer 401k - when I get close to my potential retirement date - I'll talk about going part time and/or contract employee. Perhaps do that for the last few years.

 

[jIMOh]

former employer 401ks....

As far as current employer 401k - when I get close to my potential retirement date - I'll talk about going part time and/or contract employee. Perhaps do that for the last few years.

The the former 401k (which is now either a rollover into current 401k, still in old 401k or in a rollover IRA) can be converted.

If in current 401k, the statements should show a "rollover" portion which is always tracked on it's own. I had this (we were bought out in 2000) when my 401k was rolled into new 401k without any action from me. It turns out this "rollover 401k" could be extracted from 401k and rolled into an IRA (based on plan rules) at any time. Who knew?

 

[ChrisC]

I'm not sure if this helps but I think there are tax deferred pension contribution plans in which you can take after-tax money and place them into the plan account and later rollover the after-tax contribution and the tax-deferred income/interest into two separate Roths. The after-tax contributions have no real tax consequences when rolled-over, as you have already paid the taxes on these amounts, so it's not really a conversion. But the rollover of income into another Roth would be a true conversion, with some tax consequences. So, what does this mean for planning?

For me, it means that perhaps, if I have a pile of after-tax money, I can contribute it to a tax deferred plan and let it grow and then rollover/convert in 2010. For Federal employees under CSRS, I believe they can do this under the Vountary Contribution Plan and state/municipal employees might be able to do this under 401A or 457 Plans that allow for after-tax contributions to the plans.

 

[deserat]

ChrisC - you have just decribed a 401(a) - I have one where I work - employer contributes tax deferred and I contribute after-tax - this is in addition to a 403 (b) which is tax deferred (basically a 401 (k) for nonprofits) as well as defined benefit plan, which is not COLA'd -

Great thread, although it is proving to me that tax management will be our issues in retirement and not necessarily income to cover costs. We have five separate pensions as well as after tax and tax-deferred accounts - we have a possible 10-12 year timeframe where we will only have one pension and then the pensions start coming fast and furious from age 60 on - some COLA's, some not. Our plan was to draw down the after tax during the 10-12 years - as well as convert some of the tax deferred to Roths - we may need to rethink that especially with the RMDs on the horizon.

However, it may all be moot if the tax rate goes up significantly...which I believe it will for both incomes and capital-non-capital gains, let alone local sales, property taxes, etc.

 

[baldeagle]

Few More Tidbits

I finally got a minimal web presence on Geocities to post some pdf charts that go with the original post. Four of them are at: index

The first three are supersets of the three in my original post. I.e., each has two more graphs per chart than the original in order to show two more scenarios:

1. Min RMD -- Target Roth converting so as to keep MRDs from ever exceeding our personal IRA withdrawal needs. I.e., we wag the tail, the tail doesn't wag us.
2. Min 25% bracket -- Target Roth converting so as to keep us out of the 25% bracket for life after age 70.5.

These are both pretty heavy conversions, especially the second one. Neither fares well in poor economic conditions, presumably because the early hits to portfolio value can just never catch up during such conditions.

The fourth shows how the individual accounts fare over the years with scenario 2, the best choice for our situation.

Again, thanks for all the discussion. The reason for trying to model this stuff in detail was to deduce from the generalizations I've read about down to our particular situation.

 

[Ronnieboy]

I am a large number of years off from ER, but I am planning on using one of jIMoh's plans. I have no, nor plan to receive any type of pension, so it will be me and SS (maybe).
The anticipated plan is to pull monies out of 401(k) till I hit max tax bracket at 15% and supplement rest with Roth monies. The key is to have enough in the Roth's to be able to supplement.