Help with how to manage WD from variety of taxable and tax deferred accounts

[chinaco]

So. If I am interpreting many of the responses correctly, the recommendation would be to take a tax sheltered withdrawal each year that resulted in an income tax level of 15%. If we need more income, take a taxabale account withdrawal using Long-term Cap Gain @ 15%.

That general idea sounds reasonable. I am struggling a little with the actual mechanics of doing so. We have approx 2/3 of the port in tax deferred and 1/3 in taxable accounts. We intend to spend more in the years of (55-70). That seems to work. I could delay taking some of the tax deferred money until later years. But we will start getting hit with RMDs.

We are 4 years out from retirement (ER @ 55). We intend to employ a cash account for near term spending money. The rest will be in equity and bonds (mainly). We will try to keep the bonds in the deferred accounts and equity in the taxable accounts (as much as possible).


The actual mechanics are a bit complex. Part of our problem is that we will probably have a high income from 55 - 70 that may push us into a higher tax bracket.

 

[Finance Dave]

So. If I am interpreting many of the responses correctly, the recommendation would be to take a tax sheltered withdrawal each year that resulted in an income tax level of 15%. If we need more income, take a taxabale account withdrawal using Long-term Cap Gain @ 15%.

That general idea sounds reasonable. I am struggling a little with the actual mechanics of doing so. We have approx 2/3 of the port in tax deferred and 1/3 in taxable accounts. We intend to spend more in the years of (55-70). That seems to work. I could delay taking some of the tax deferred money until later years. But we will start getting hit with RMDs.

We are 4 years out from retirement (ER @ 55). We intend to employ a cash account for near term spending money. The rest will be in equity and bonds (mainly). We will try to keep the bonds in the deferred accounts and equity in the taxable accounts (as much as possible).


The actual mechanics are a bit complex. Part of our problem is that we will probably have a high income from 55 - 70 that may push us into a higher tax bracket.

I don't understand...how will you have a "high income from 55-70 that may push us into a higher tax bracket"? If you follow the strategy outlined, that can't happen. You take from the taxable accounts ONLY the amount that takes you up to the 15% bracket.....no more. This GUARANTEES that you don't go into the next bracket.

I must be missing a key fact from what you're planning to do..so I'll apologize in advance...please let us know more.

Dave

 

[chinaco]

FD... I left a fact out of the original post.

Can I juggle the different accounts to minimize taxes. My pension will account for 10% of our income needs (there goes a portion of the 15% tax braket). The income we want to draw would put us in the 33% tax bracket if it were normal wages... Of course it will not be wages, but that seems like a lot ground to cover. I hope our income needs do not push us into the 25% bracket.

You may be correct. I have not actually projected the numbers yet... I am eyeballing it. Plus, I have not spent much time studying the subject matter yet. The last 25 years was spent studying accumulation rather than tax efficient WD.

It seems like many moving parts... Am I over complicating it?

We have 2/3 in tax deferred and 1/3 in a taxable account. The taxable account has a tax basis of about 50%. The tax deferred accounts (several different types) have an average tax basis of only about 10%. But some of the tax defered accounts are setup such that most of the $ that have taxes paid are in a trad IRA, Var Annuity, and a couple of small Roth IRAs.


I am struggling with the moving parts of:
- How to withdraw retirement income tax efficiently.
- Rolling deferred money into a Roth over time.
- Attempt to keep most of the bond allocation in a tax deferred account.
- Rebalance the general portfolio each year to keep allocations in line.

It has occurred to me that this might be too much to try to accomplish and keep things in a 15% range.

Our allocations:

- 401ks (12%)
- Deferred Var Annuity (7%) .... I know, I know... other tax def was maxed out at the time
- IRAs (9%)
- Profit Sharing Trust (36%) retirement equivalent of pension
- Taxable Assets (MF accounts) (36%)


We may get a little help from one of the tax deferred accounts. DW has a Profit Sharing trust. It included 100% company stock until recently (company rules for equity holdings). She recently moved 60% of the money was moved into MF to diversify. That leaves 40% in company stock that has accrued for about 25+ years... 30 years when she retires. She has no choice but to keep it in company stock. I am checking out the IRS rule for Net Unrealized Appreciation. It looks like she can take a step up value (tax basis) and roll the stock to an IRA and then sell the shares and diversify the assets. If it turns out that we can do this... I am wondering if that money can be converted to a Roth IRA. If so, this would help. The company stock would push about 12% of our assets into the Roth with no future tax burden. Since the taxes paid would be on the original share prices, we believe the tax would be fairly small (in relative terms) on the NUA tax manuever. But, I am still trying to find out if the NUA is an option.

 

[jIMOh]

- 401ks (12%)
- Deferred Var Annuity (7%) .... I know, I know... other tax def was maxed out at the time
- IRAs (9%)
- Profit Sharing Trust (36%) retirement equivalent of pension
- Taxable Assets (MF accounts) (36%)

Would 3% of the 36% in taxable accounts be enough to live off of? I might suggest if it comes CLOSE to invest the taxable accounts in dividend paying securities, which should keep tax bill low.

There are advantages to letting 401k and other tax defferred vehicles grow tax free while spending down taxable accounts... there is some merit if you "know" what the RMD would be on the 401k at 70.5 to spending some of the 401k now so the RMD would not push you into a higher tax bracket.