Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Drawdown order for different types of accounts
Old 06-23-2021, 09:40 AM   #1
Dryer sheet wannabe
 
Join Date: Jun 2019
Posts: 14
Drawdown order for different types of accounts

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?
tofer is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 06-23-2021, 09:47 AM   #2
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Sarasota, FL & Vermont
Posts: 32,884
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).
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.

Retired Jan 2012 at age 56
pb4uski is online now   Reply With Quote
Old 06-23-2021, 09:47 AM   #3
Thinks s/he gets paid by the post
 
Join Date: Jul 2011
Location: Reading, MA
Posts: 1,049
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...
TheWizard is offline   Reply With Quote
Old 06-24-2021, 01:23 AM   #4
Thinks s/he gets paid by the post
 
Join Date: Oct 2007
Location: Willamette Valley, Oregon
Posts: 1,979
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.
__________________
Dreams Worth Dreaming are Dreams Worth Planning For. I Spent a Career Planning for Early Retirement.
RetireeRobert is offline   Reply With Quote
Old 06-24-2021, 06:33 AM   #5
Thinks s/he gets paid by the post
 
Join Date: Mar 2011
Location: North TX
Posts: 1,191
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.
Surewhitey is online now   Reply With Quote
Old 06-24-2021, 06:47 AM   #6
Thinks s/he gets paid by the post
 
Join Date: Jul 2013
Posts: 1,604
I think iorp can provide suggestions:

https://www.i-orp.com/Plans/index.html
mrfeh is online now   Reply With Quote
Old 12-08-2022, 11:41 AM   #7
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
RunningBum's Avatar
 
Join Date: Jun 2007
Posts: 12,537
Quote:
Originally Posted by pb4uski View Post
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.
RunningBum is offline   Reply With Quote
Old 12-08-2022, 12:16 PM   #8
Thinks s/he gets paid by the post
 
Join Date: Nov 2006
Posts: 1,352
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.
PatrickA5 is online now   Reply With Quote
Old 12-10-2022, 07:06 AM   #9
Dryer sheet wannabe
 
Join Date: Nov 2022
Location: Champaign
Posts: 10
Quote:
Originally Posted by RunningBum View Post
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.
Retired2021 is offline   Reply With Quote
Old 12-10-2022, 07:17 AM   #10
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Sarasota, FL & Vermont
Posts: 32,884
Quote:
Originally Posted by RunningBum View Post
... 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.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.

Retired Jan 2012 at age 56
pb4uski is online now   Reply With Quote
Old 12-10-2022, 07:29 AM   #11
Full time employment: Posting here.
 
Join Date: Oct 2015
Posts: 876
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!
DawgMan is offline   Reply With Quote
Reply

Tags
ira, roth, savings, taxes


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Order of accounts for Roth Conversions? Splash FIRE and Money 10 04-14-2018 04:06 PM
Minimize taxes during drawdown from various account types in retirement RioIndy FIRE and Money 5 01-27-2018 08:54 PM
Various sources/types of IRA accounts - OK to combine? stephenson FIRE and Money 2 05-09-2017 04:02 PM
Drawdown of His and Her Retirement Accounts...? topsider FIRE and Money 1 07-13-2016 01:52 PM
Any reason to keep different "types" of credit cards? mpeirce FIRE and Money 43 06-22-2016 08:45 AM

» Quick Links

 
All times are GMT -6. The time now is 09:58 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2023, vBulletin Solutions, Inc.