comments wanted

[davidbeitz]

I’m 60, retired and trying to decide how to begin my withdraw strategy. I’ll need to draw from my accounts to meet our budget in the range of 2.5%. The question is which account the money comes from.

For the next few years my projected taxable income will be at the upper end of the 10% bracket and i have approx 80% of my retirement funds in tax deferred accounts.

My FI recommends that I take the “typical” route and take from cash, brokerage, roth(s) in that order, however if I setup my my accounts (after tax brokerage and tax deferred) to distribute any dividends and interest into my budget account, I can come really close to not needing to sell any funds to meet our expenses.

This would be a tax liability since it’s from a tax deferred account that would move me into the low 12% bracket

Can anyone comment on these two methods? Pros? cons?

Thanks!

[Spock]

The current tax rates expire in 10 years, so some talking heads view them as a gift to retirees to withdraw tax deferred now at lower rates. Flip a coin as to if you think the rates will go back up to slow the deficit or not.


I just spent three days crawling through my Dad's taxes. He was in the 10% bracket in 2017, took a 12K IRA closeout in 2018 so he should just brushed the 12% bracket.
However, he ended up paying 6x more tax due in 2018 than 2017. I think it was due to what they call the "tax torpedo". The 12K was taxed at 12%, but it exposed 85% of his SS benefits to also be taxed at 12%.



So. Unless you are managing MAGI to qualify for ACA subsidies, I'd be taking distributions from the tax deferred accts with the lower brackets now to minimize RMDs later. You can roll them into a Roth IRA if you're not going to need the $ for awhile.


But it all depends as to your unique balances and tax brackets.

[GalaxyBoy]

Have you tried running your numbers through i-ORP? You probably want the extended version.

https://www.i-orp.com/bequest/index.html

If you already use it, then never mind. If it's new to you, allocate a weekend to understand it and crunch some numbers.

[RunningBum]

Can the thread title please be updated to include what comments are wanted about? How about "Comments wanted on ER withdrawal strategy"?

[gwraigty]

Quote:

Originally Posted by RunningBum Can the thread title please be updated to include what comments are wanted about? How about "Comments wanted on ER withdrawal strategy"?

+1

[ziggy29]

Do you think there's a chance that future income (such as RMDs) would kick you into a significantly higher bracket in the future (say, *above* the 12%)?

If so, AND if you are not managing MAGI for ACA purposes, I'd try to pretty much use up all of the 12% bracket. That would reduce your RMDs in the future to keep you in a lower bracket (or at least subject less of it to a much higher tax bracket).

So late in the year, I'd be inclined to project my taxable income for the year if I did nothing, then withdraw from tax-deferred accounts to increase that taxable income until I'm close to exhausting the 12% bracket.

Another potential strategy, as long as you are in those lower brackets, is to capture LONG TERM capital gains by selling and repurchasing stocks and ETFs held in taxable accounts. Using the FIFO method, sell off shares that generate long term capital gains, then repurchase the same dollar amount. That will generate *zero* capital gains taxes in the 12% bracket and below, and effectively allow you to increase your cost basis with no tax hit. (Again, make sure not to exceed the 12% bracket.)

You could do either of those to use up the 12% bracket, or a combination of the two. But watch projected taxable income like a hawk.

[LARS]

Quote:

Originally Posted by ziggy29 Do you think there's a chance that future income (such as RMDs) would kick you into a significantly higher bracket in the future (say, *above* the 12%)? If so, AND if you are not managing MAGI for ACA purposes, I'd try to pretty much use up all of the 12% bracket. That would reduce your RMDs in the future to keep you in a lower bracket (or at least subject less of it to a much higher tax bracket).

Only other issue is if a person plans to move to a different state with no, or much lower, state tax rate. Needs to be factored into calculations if that is the case: extreme being places like FL or WY with no state income tax.

[walkinwood]

Michael Kitces had a great post on this topic. It is well worth spending the time to really understand the points he's making and see how they apply to your situation. This was before the latest tax cuts, so you'll have to take that into account though the broad strokes stay the same. He doesn't take ACA subsidies into account.


The strategy is similar to what ziggy and others have suggested above, but the article goes into a lot of detail

Quote:

However, the optimal approach is actually to preserve the tax-preferenced value of retirement accounts and to fill the tax brackets early on, by funding retirement spending from taxable investment accounts but doing systematic partial Roth conversions of the pre-tax IRA to fill tax brackets in the early years.

https://www.kitces.com/blog/tax-effi...pending-needs/

[Gotadimple]

Please clarify that the 80% of your income in Tax-deferred is a traditional IRA or 401K, not a Roth. Roth IRAs are tax-free because you paid tax on the $ before you deposited and all income is tax-free. You shouldn't have to worry about IRMAA affecting your Medicare Part B premium unless you get to the top of the 12% bracket (as it is currently defined).



- Rita

[ajs56]

Quote:

Originally Posted by RunningBum Can the thread title please be updated to include what comments are wanted about? How about "Comments wanted on ER withdrawal strategy"?

+1

[FREE866]

I'm only 52 so don't need to worry at this point, but I find this very confusing!