Help with my Strategy

[FireCat]

Good day, My wife and I have been retired for 4 years and are living off my cola'd pension with survivor benefit of 66% which puts us just below the 22% marginal tax rate. I, like many here seem to be having trouble kick starting the "Spend that Dough" wheel. Hoping to get it going this year. We have about 900k in taxable, tIRA, and Roth's with about 75k in cash. Our taxable account is about 125k, tIRA 650k and Roth 125k. We are 56 me and 59 DW.

My plan is to withdraw up to $40k each year for spending and if we don't spend it all convert the balance into a Roth. I am thinking of doing this all in one shot during the year. All of our investments are in 4 funds. VTI, VXUS, BND, and BNDX in a roughly 70/30 stock to bond and a 60/40 domestic to international within that.

We should always have the ability to live off the pension for several years so are not dependent on the withdrawals. I feel it's a wash either taking the money out now at 22% or later when we will still be under 24% when RMD's start. My only concern is if one of us "Joins the majority" the other will be put in a much higher tax bracket so maybe I should convert as much as possible as soon as possible. Both of us are in good health and are planning on living a long healthy life, but you never know.

My questions are

1. Is there a reason to try to make the withdrawals monthly vs. at the beginning or end of each year?

2. Should I just do conversions in a large market downturns to take advantage of the rebound when it happens?

3. Should I not worry about conversions and just take out what we want to spend when we want to spend it and keep the money in the tIRA's as long as possible.

4. Should I start spending down some cash and then take money from taxable before tapping our tIRA's?

5. Also thinking about starting CD ladder with my BND and BNDX funds as I cash them out when not converting and buying same funds in our Roth's.

Would lastly like to thank all of those in the forum as I have learned a lot and appreciate the folks who contribute greatly.

 

[HI Bill]

1. Monthly distributions provide a 'dollar cost averaging' type of benefit, along with showing 'regular' income, in case you wanted to take out a loan. I'd personally just do it quarterly, waiting for some relative 'up periods' in the market. I don't understand the logic of withdrawing everything on January 2, other that not having to worry about the markets for a year.

2. Yes, IF you can successfully time the market, LOL!

I would make regular distributions from the IRA now (and reinvest if you wish) , as you have no idea whether the tax brackets will be higher when you hit 70.5. I find this likely, as low tax rates don't help our federal debt or deficit.

Only the gains portion of your taxable accounts are subject to tax (not the principal), so you'll incur far less tax taking $ from those accounts. Personally, I'd work on reducing the tax liability of the tIRAs, as in the future, it sounds like your SS will be 85% taxable, and your RMDs are 100% taxable. Why not take advantage of the current low tax rates? Many here would advise to do ROTH conversions, but I'm not an expert in this.

 

[RunningBum]

Of the three types of accounts, a Roth is the most preferable to hold money because growth is tax free. So I would be spending down at least some of the taxable, and converting from the tIRA instead of spending that money, as much as possible. Probably keep some in taxable for flexibility, large purchases, and emergencies.

I don't have a full understanding of your situation to understand if and how much Roth conversions right now are a good idea. I'd need a better understanding how your income looks in the future, especially when you'd have to take RMDs and start taking SS. Did you arrive at that $40K figure from the tIRA based on an analysis, or just a feeling? It's a complicated calculation but I do my best for my situation.

Conversions at a market low are preferable but I wouldn't wait for a low to convert. I prefer to convert earlier in the year, under the assumption that usually investments grow over the year so better to convert sooner than later. However, now I'm managing towards getting an ACA subsidy so I convert late in the year when I see how much room I have to convert. I don't have that much room to convert much; if I did I'd convert the bulk early in the year, and top it off later.

I make withdrawals from my account as needed, rather than on schedule, but others have good reasons to do it on a schedule and simulate a paycheck. I don't think there's a strong reason to avoid one way or another.

 

[pb4uski]

..... My plan is to withdraw up to $40k each year for spending and if we don't spend it all convert the balance into a Roth....

You can't do that.... you can do withdrawals or you can do Roth conversions, but once it is withdrawn you can't just plunk it it the Roth and call it a Roth conversions. Roth conversions can only be done from a tIRA to a Roth.

Also, you can't withraw from tIRAs for spending without a 10% penalty until you are 59 1/2 so in 1/2 year for your DW and 3 1/2 years for you.

 

[pb4uski]

....My questions are

1. Is there a reason to try to make the withdrawals monthly vs. at the beginning or end of each year?

2. Should I just do conversions in a large market downturns to take advantage of the rebound when it happens?

3. Should I not worry about conversions and just take out what we want to spend when we want to spend it and keep the money in the tIRA's as long as possible.

4. Should I start spending down some cash and then take money from taxable before tapping our tIRA's?

5. Also thinking about starting CD ladder with my BND and BNDX funds as I cash them out when not converting and buying same funds in our Roth's.

Would lastly like to thank all of those in the forum as I have learned a lot and appreciate the folks who contribute greatly.

1. Not really. I do my withdrawals in December when I do my year end tax planning and rebay portfolio. During the year we live off of my small pension and online savings account.

2. Perhaps. You should at least convert to the top of the 12% tax bracket, but it sounds like it won't be a lot in your case.

3. No... if you can do penalty-free withdrawals at tax rate lower than what you ultimately expect to be in then you should... same rate maybe because if one of you dies the surviving spouse will likely be pushed into a higher tax bracket.

4. No... in fact, you should do the opposite.

5. Good idea.. I prefer CDs over bond funds, but all of fixed income is challenging these days... CD yields are low but you can occasionally snag a special.. I got in on a 3.5% 5-year CD back in April.

 

[RunningBum]

4. Should I start spending down some cash and then take money from taxable before tapping our tIRA's?

4. No... in fact, you should do the opposite.

What's your rationale here? Isn't it better to have the same amount of money in a Roth rather than in taxable?

 

[pb4uski]

The rationale is to tap tax-deferred money while you are in a low tax bracket... before SS kicks in and they are in a higher tax bracket... also to reduce tax-deferred accounts for the surviving spouse.

 

[RunningBum]

The rationale is to tap tax-deferred money while you are in a low tax bracket... before SS kicks in and they are in a higher tax bracket... also to reduce tax-deferred accounts for the surviving spouse.

OK, I misread what the OP wrote, I thought they asked about tapping taxable while converting part of the IRA to a Roth. I'm not even sure what they were asking now, but conversions were not mentioned.

My pref is still to convert rather than spend tIRA money if I can, but one way or another I agree it's a good idea to try to reduce the tIRA in the ER years before SS kicks in.

 

[FireCat]

Thanks all for your advice. I was planning on spending down our tIRA’s first to soften any RMD hit and convert to Roth’s any money up to the 4% per year annually.

 

[joylesshusband]

...convert to Roth’s any money up to the 4% per year annually.

What is this "the 4%" you speak of, and where did it come from?

What did it do to deserve the definite article "the"?

How much to annually convert to Roth is chiefly driven by two things:
1. income tax limits and brackets
2. needs for liquid money "on tap (without any immediate income tax considerations)" on a whim.

 

[FireCat]

Hello Joyless! My plan is to spend or convert up to The 4% of my total portfolio. My withdrawals for spending will always keep me squarely in the 22% bracket unless I went crazy and convert more than 4%. My plan is to convert whatever I don’t want to spend up to the 4% I would potentially just take out of our tIRA’s. Some years I may not want to spend beyond say 10-20k. I realize when converting it doesn’t really matter regarding %’s. It’s just a number I would stick to for spending and a number if I convert all of it would keep me in the tax bracket I want to stay in as well as not be too large of a tax hit on the conversions or combo withdrawals and or conversions.

 

[RunningBum]

Most people would think of Roth conversions as entirely separate from your 4% WR. Can you explain why you tie the two together? Spending is spending, you want to stay at some safe spending/withdrawal rate. Conversion is just moving money from one pocket to another, and paying the tax due. It makes no sense to me to combine them, but maybe you can explain it.

Realize that if/when either you or your wife goes, the other will most likely be in a higher bracket. That would favor converting to the top of 22% while you are still both alive.

Yes, it's a larger tax hit to convert to the top of 22%, but don't fall into the trap of thinking all of your tIRA is yours. There is a tax liability to be paid at some point. It's the same as when you were working, if you had a $100K salary, that $100K was not all yours to take home. Some of it was taxed. And now you have to pay the tax on the part that was deferred.

 

[pb4uski]

Thanks all for your advice. I was planning on spending down our tIRA’s first to soften any RMD hit and convert to Roth’s any money up to the 4% per year annually.

Since it sounds like you'll be in the 22% bracket for life no matter what, you may want to reframe it as a combination of tIRA withdrawals for spending money supplemented by Roth conversions to the top of the 22% tax bracket. The Roth conversion isn't really a withdrawal... it is just moving $1 from your left pocket to your right pocket and then taking 22c out of your back pocket to pay the taxman.

That will reduce your RMDs and also the tax hit for the surviving spouse should one of you die prematurely.

 

[jimandthom]

We do #2,3 and 4. Number 1 is 3-4 lumps each year.

When I start SS and maybe my small private pension in 2020, might stay doing lumps sums, may not.

The only plan we have is to do 1 through 4 in such a manner as to stay in the 12% tax bracket while doing what we must do, want to do and what we want to be able to in the future.

 

[joylesshusband]

...It’s just a number I would stick to for spending and a number if I convert all of it would keep me in the tax bracket I want to stay in as well as not be too large of a tax hit on the conversions or combo withdrawals and or conversions.

I now understand your reasoning.
However, as others already pointed out, there is no reason to compute what percentage of your portfolio you withdraw and/or convert each year.

As to your annual combination of tIRA withdrawals and Roth conversions - I chose to simplify things by converting a predetermined amount X in JAN each year to Roth, and then withdraw from the Roth throughout the year whenever I have the need or the desire.
There's a small leftover I am to convert in late DEC once my tax picture gets crystal clear (dividends and cap. gains already reported) - just a buffer amount to get me to the total income I wish to declare next APRIL.

 

[Dtail]

I now understand your reasoning.
However, as others already pointed out, there is no reason to compute what percentage of your portfolio you withdraw and/or convert each year.

As to your annual combination of tIRA withdrawals and Roth conversions - I chose to simplify things by converting a predetermined amount X in JAN each year to Roth, and then withdraw from the Roth throughout the year whenever I have the need or the desire.
There's a small leftover I am to convert in late DEC once my tax picture gets crystal clear (dividends and cap. gains already reported) - just a buffer amount to get me to the total income I wish to declare next APRIL.

I am curious as to your converting to a Roth for further usage vs. just distributing to Taxable and using it.
I assume this assists you in having a better handle on your eventual taxes?

 

[joylesshusband]

I am curious as to your converting to a Roth for further usage vs. just distributing to Taxable and using it.
I assume this assists you in having a better handle on your eventual taxes?

I'm afraid this derails the thread a bit, but let's have it.

It is virtually impossible to have "a better handle on my eventual taxes" as you put it, since I already have a perfect handle on said taxes.
In DEC I have a very precise picture of my eventual income tax for the next year, which allows me to do ~98% of my desired Roth conversion amount as early as the first week in JAN.

Then, during the year I withdraw from Roth for consumption when and however much I wish (I do have a pension, thus the portfolio withdrawals are mostly "play money"). I seldom touch my taxable account.

Does this answer your question?

 

[pb4uski]

....Then, during the year I withdraw from Roth for consumption when and however much I wish (I do have a pension, thus the portfolio withdrawals are mostly "play money"). I seldom touch my taxable account.

Does this answer your question?

Why are you spending money from your Roth? Given that a Roth is tax-free shouldn't that be the last account to be spent?... it is for me.

 

[Dtail]

I'm afraid this derails the thread a bit, but let's have it.

It is virtually impossible to have "a better handle on my eventual taxes" as you put it, since I already have a perfect handle on said taxes.
In DEC I have a very precise picture of my eventual income tax for the next year, which allows me to do ~98% of my desired Roth conversion amount as early as the first week in JAN.

Then, during the year I withdraw from Roth for consumption when and however much I wish (I do have a pension, thus the portfolio withdrawals are mostly "play money"). I seldom touch my taxable account.

Does this answer your question?

Sure Joyless....

 

[HI Bill]

Why are you spending money from your Roth? Given that a Roth is tax-free shouldn't that be the last account to be spent?... it is for me.

+1! My understanding it is generally (always?) beneficial to let the ROTH grow as long as possible, since the gains are NEVER taxed. My goal is to draw down taxable accounts and traditional tax-deferred accounts prior to RMD age. After RMD age is the perfect time to tag ROTH accounts, especially after the other accounts have been depleted.

 

[RunningBum]

Like most things, it depends. If you know you'll leave something behind, maybe it is better to spend down a Roth rather than cash in highly appreciated taxable assets, since those will get a step up basis when inherited.

 

[joylesshusband]

Why are you spending money from your Roth? Given that a Roth is tax-free shouldn't that be the last account to be spent?... it is for me.

I am not spending money from my Roth, I'm essentially spending from my tIRA as I already explained. Twice.

It is just that I chose to have this spending money pass through my Roth, as opposed to wasting time and effort on determining how to divvy up the annual amount I wish to declare as income between direct tIRA withdrawals and tIRA->Roth conversions. The total income tax is the same either way.

As to why I'm not spending from taxable - my calculations show that my approach allows me to convert a few more $k to Roth per annum than I would have been able to if I spent from taxable (full of highly appreciated assets).

Your situation is different; it does not mean that what is right for you is correct for me and vice-versa.

 

[pb4uski]

I see now... a bit of an different way to do it but I get the idea. The Roth conversion that is spent is effectively the same as a tIRA withdrawal that is spent and whatever is not spent is effectively a Roth conversion.. and they you top it up with an additional Roth conversion as you are finalizing your tax situation.

I guess I do the opposite... a tIRA withdrawal to rebalance my cash to target (effectively to replenish cash for spending since the beginning of the year) and then a Roth conversion to the top of the desired tax bracket (0% capital gains bracket in my case).

But the end result of each is similar.

 

[jimandthom]

joyless--- You are totally correct, that if you convert to Roth you pay the tax and if you withdraw from tIRA you pay the tax. And it'll be the same %.

I've thought about the same thing from time to time, but it often appears from reading here and elsewhere that Roth $$s are never ever to be spent. Never wanted to raise the consideration.

 

[RunningBum]

I've thought about the same thing from time to time, but it often appears from reading here and elsewhere that Roth $$s are never ever to be spent. Never wanted to raise the consideration.

I don't think that's the case at all. There's just a priority order in which you should tap accounts (for tax efficiency). As I noted above, it's different for different people. For me, I'm less likely to touch my highly appreciated taxable mutual funds, unless the stepped-up basis tax law changes.

Most of us are planning for at least a near worst case scenario. If that doesn't happen, we're going to leave money behind. But if things are bad, we will not hesitate to use all money, including Roth funds or whatever funds you plan to tap last. So it's not a matter of "never ever" tapping those funds, it's that those are the last resort funds, which may not be needed.

I think that's a big difference from declaring an account as off-limits and never ever to be spent.