Drawdown order for different types of accounts

[tofer]

Is there conventional wisdom that says what order to draw down your different types of savings (taxable, IRA, and ROTH)? I've done some analysis that says to always use up taxable savings first (to defer taxes as much as possible), and Roth last (to let it grow as long as possible). Is this always the best strategy?

 

[pb4uski]

Yes, the conventional drawdown priority is taxable, tax-deferred and tax-free and IMO it is hard to go wrong with that, especially if it is supplemented by Roth conversions from tax-deferred to tax-free as your tax situation allows at a lower tax cost than later when you are colecting pensions, SS and RMDs.

Another option if taxable is in appreciated equities and retirement is very well funded is to leave taxable alone, withdraw from Roth and then do Roth conversions from tax-deferred as tax situation allows to refill the tax-free. The play is that heirs get a stepped-up basis when you die so a hope that taxes on those unrealized gains never happen (assuming that stepped up basis is still around).

 

[TheWizard]

That's the strategy for early retirees since you can't easily withdraw from tax-deferred before 59-1/2.

But situations vary.

When I retired eight years ago at 63, I had a large tax-deferred account, a modest Roth IRA and essentially zero taxable account.
So all my withdrawals came from tax-deferred.

Nowadays, I still have a good sized tax-deferred 403(b), but a much larger Roth IRA, and a nicely growing taxable account where I stash excess retirement income...

 

[RetireeRobert]

I would say there is no "conventional" wisdom, as so much depends on a person's particular financial situation. How old are you, what types of income do you have, what are the relative sizes of your taxable vs nontaxable accounts, what are your income needs, what unrealized gains exist in taxable accounts that would have to be realized upon withdrawal, what are your intended uses for making a withdrawal, and on and on and on.

 

[Surewhitey]

All of the above. In our situation, we will likely be doing Roth conversions and living off taxable for maximizing ACA benefits and lowering future taxes. Gradually we could use the principle of the Roths to supplement if needed, but not planning to do it.

We are 50 & 56 & need 10+ years of "bridge" monies once we actually start. Waiting for DW's comfort zone to kick in.

 

[mrfeh]

I think iorp can provide suggestions:

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

 

[RunningBum]

Yes, the conventional drawdown priority is taxable, tax-deferred and tax-free and IMO it is hard to go wrong with that, especially if it is supplemented by Roth conversions from tax-deferred to tax-free as your tax situation allows at a lower tax cost than later when you are colecting pensions, SS and RMDs.

Another option if taxable is in appreciated equities and retirement is very well funded is to leave taxable alone, withdraw from Roth and then do Roth conversions from tax-deferred as tax situation allows to refill the tax-free. The play is that heirs get a stepped-up basis when you die so a hope that taxes on those unrealized gains never happen (assuming that stepped up basis is still around).

I have been looking at my own situation and came to my own conclusion that the second option was for me. Before starting a thread just to see if there were any gotchas I didn't consider, I did a search and found this thread from last year. For now I've got some accessible money in taxable but it won't even get me to 65. I'm 61 now. The rest of my taxable is all ETF shares with 40% or more LTCGs.

Certainly while I'm on ACA I'd rather not take more income from selling holdings with large gains in taxable. Any income space I do have I'm using for Roth conversions. I should be able to finish conversions sometime between 65 and 70 and should be able to take some gains at 0% tax. Once I'm on SS I'll need a lot less but if I have to sell at 15% LTCG tax I will, watching IRMAA tiers.

I'm actually taking from my HSA first, to the extent I have saved medical receipts, then Roth.

It's taking a mind shift to withdraw from the Roth first, because that's usually thought of as the last to touch. Then I remind myself that I saved this money to be able to use it in retirement, which is where I'm at.

Why do Roth conversions and Roth withdrawals in the same year instead of doing tIRA withdrawals? These are different events with different triggers. I do a larger conversion earlier in the year and top it off at the end of the year, and will do withdrawals when needed. If they happen to at the same time I'll just do a direct tIRA withdrawal, but otherwise I'll keep them separate.

Yet another reason to take from HSA/Roth before taking LTCGs is that if my medical expenses are high late in life (assisted living, memory care, etc) I can sell and write off the expenses against the income. Not quite as efficient as leaving some tax deferred for this but I don't know if and how much I'd need, and if I fully convert my IRA I won't have to deal with RMDs in the years before I have those high expenses.

So, does anyone see any flaws in this strategy? I'm 61, and my Roth has been open far longer than 5 years. Planning to take SS at 70, but will revisit this decision at 65.

 

[PatrickA5]

I plan on mix and matching tax free, taxable, and tax deferred on a yearly basis to make sure I stay in the 12% bracket going forward.

I'm done with conversions.

I plan on taking distributions from tax deferred up to close to the standard deduction and then filling in with taxable (and maybe a little tax-free) up to the top of the 12% bracket. I'll never be lower than the 12% bracket, so the objective would be to try to stay out of the higher brackets down the road.

 

[Retired2021]

I have been looking at my own situation and came to my own conclusion that the second option was for me. Before starting a thread just to see if there were any gotchas I didn't consider, I did a search and found this thread from last year. For now I've got some accessible money in taxable but it won't even get me to 65. I'm 61 now. The rest of my taxable is all ETF shares with 40% or more LTCGs.

Certainly while I'm on ACA I'd rather not take more income from selling holdings with large gains in taxable. Any income space I do have I'm using for Roth conversions. I should be able to finish conversions sometime between 65 and 70 and should be able to take some gains at 0% tax. Once I'm on SS I'll need a lot less but if I have to sell at 15% LTCG tax I will, watching IRMAA tiers.

I'm actually taking from my HSA first, to the extent I have saved medical receipts, then Roth.

It's taking a mind shift to withdraw from the Roth first, because that's usually thought of as the last to touch. Then I remind myself that I saved this money to be able to use it in retirement, which is where I'm at.

Why do Roth conversions and Roth withdrawals in the same year instead of doing tIRA withdrawals? These are different events with different triggers. I do a larger conversion earlier in the year and top it off at the end of the year, and will do withdrawals when needed. If they happen to at the same time I'll just do a direct tIRA withdrawal, but otherwise I'll keep them separate.

Yet another reason to take from HSA/Roth before taking LTCGs is that if my medical expenses are high late in life (assisted living, memory care, etc) I can sell and write off the expenses against the income. Not quite as efficient as leaving some tax deferred for this but I don't know if and how much I'd need, and if I fully convert my IRA I won't have to deal with RMDs in the years before I have those high expenses.

So, does anyone see any flaws in this strategy? I'm 61, and my Roth has been open far longer than 5 years. Planning to take SS at 70, but will revisit this decision at 65.

I'm 61, DW is 62. We're retired and on ACA. We are onboard with this strategy. Gonna finish Roth conversions between 65 and 72 while on Medicare fitting into the IRMMA tiers to minimize those premiums.

 

[pb4uski]

... Why do Roth conversions and Roth withdrawals in the same year instead of doing tIRA withdrawals? These are different events with different triggers. I do a larger conversion earlier in the year and top it off at the end of the year, and will do withdrawals when needed. If they happen to at the same time I'll just do a direct tIRA withdrawal, but otherwise I'll keep them separate.

Yet another reason to take from HSA/Roth before taking LTCGs is that if my medical expenses are high late in life (assisted living, memory care, etc) I can sell and write off the expenses against the income. Not quite as efficient as leaving some tax deferred for this but I don't know if and how much I'd need, and if I fully convert my IRA I won't have to deal with RMDs in the years before I have those high expenses.

So, does anyone see any flaws in this strategy? I'm 61, and my Roth has been open far longer than 5 years. Planning to take SS at 70, but will revisit this decision at 65.

What you wrote makes sense and is very close to our strategy except we no longer have any appreciated securities in taxable so we don't have any step up to consider.

Similar to you, I do a large portion of our Roth conversion in January and then top it up in December to my target for the year. Whle we haven't started Roth withdrawals yet, we will in a year or two. The way I look at it whatever Roth withdrawals that I do during the year, in combination with Roth conversions is simily in effect tIRA withdrawals for spending, with the advantage and any excess of Roth conversions over Roth withdrawals ends up staying in the Roth to grow tax-free.

A couple years ago I did a big withdrawal from our HSAs for medical expenses for 2010-2019 and from that point forward do annual withdrawals about the time that I finish up ou tax return... typically for our Part B and Part D premiums, vision, dental, Part B medical deductible, etc.

 

[DawgMan]

As others have said, it all depends. If legacy and/or future single spouse tax burdens is your priority then doing over the top Roth conversions are probably a priority. If ACA/IRMAA is your priority then living off your after tax accounts may be preferred. Personally, as someone who has a higher than average planned annual spend, my focus is trying to some level off Roth conversions to even out my (hopefully) tax burden when RMDs hit. I am more interested in optimizing my assets for my use while alive with family/friends than making sure my kids don't have to pay taxes on inherited wealth. First world problems can be a b*tch!