How Do You Withdraw?

[simple girl]

Yes, you got it. It dawned on me that after I turned 59 1/2 that is better to tap tax-deferred accounts to reduce future RMDs and let taxable account investments grow and potentially get a stepped up basis so the embedded gains never get taxed. Unfortunately, I didn't have that epiffany until 2018 when I turned 63, and as a result of annual rebalancing had over 3 years filled about $100k of headroom with LTCG that could have been better used to reduce tax-deferred balances.

We didn't have the complication of managing income for ACA subsidies.

Got it. That complication of managing income for ACA subsidies is actually the only reason I'm looking at tapping the 401K before using all of our taxable account up. I would have done the same thing you did - fully tap the taxable account first - that seemed to be the standard advice I was reading everywhere.

Thank you for sharing your mistake as it is helping me learn more about tax stuff/RMD's - which I have been putting my head in the sand about for a while now. Taxes are not my forte!

The stepped up basis thing - that just applies if you are giving $ to your children, right? I looked it up and didn't see that it applied to any other situation. We don't have children so I'm thinking this isn't something that could apply to our situation.

 

[pb4uski]

No, the stepped up basis is when one inherits stock... your stepped up basis is the value on the date of death... so if I die and have a taxable account worth $100k with a basis of $40k with DW as the beneficiary, DW avoids tax on $60k... she can sell for $100k and pay no tax. Same works if I inherit her account... or for 1/2 for joint accounts in community property states.

 

[simple girl]

No, the stepped up basis is when one inherits stock... your stepped up basis is the value on the date of death... so if I die and have a taxable account worth $100k with a basis of $40k with DW as the beneficiary, DW avoids tax on $60k... she can sell for $100k and pay no tax. Same works if I inherit her account... or for 1/2 for joint accounts in community property states.

AHA! I just learned something else I had no clue about. Well, we own the taxable account jointly. Florida is not a community property state. Apparently it uses something called Equitable Distribution. Any clue what that means if one of us should pass, and we still have $ our joint taxable account?

 

[pb4uski]

In equitable distribution states, generally only the separate property belonging to the deceased spouse and half of any jointly owned property receives a step-up in tax basis.

https://tomorrow.me/trust-worthy/pl...ow-if-you-live-in-a-community-property-state/

Let's say that your taxable account is worth $500k and your basis is $200k and one of you dies. As of the date of death the new basis is $350k ($200*50% for your piece and $500k * 50% for the inherited piece). So at 15%, you've saved $22.5k in tax.

 

[simple girl]

https://tomorrow.me/trust-worthy/pl...ow-if-you-live-in-a-community-property-state/

Let's say that your taxable account is worth $500k and your basis is $200k and one of you dies. As of the date of death the new basis is $350k ($200*50% for your piece and $500k * 50% for the inherited piece). So at 15%, you've saved $22.5k in tax.

Thank you so much. I had to think about that hard and discuss with DH, but we finally get it. Another benefit to using part of our 401K earlier than we had thought.

That's 3 reasons now:

1) MAGI management for ACA - extend taxable account $$$ over more years
2) reduce RMD hit when our SS and pensions start since we have a fair amount in 401k's/IRA's
3) preserve a bit of extra $ from taxes should one of us pass early (hopefully won't need this "benefit")

Much appreciated!

 

[Huston55]

Yes, you got it. It dawned on me that after I turned 59 1/2 that is better to tap tax-deferred accounts to reduce future RMDs and let taxable account investments grow and potentially get a stepped up basis so the embedded gains never get taxed. Unfortunately, I didn't have that epiffany until 2018 when I turned 63, and as a result of annual rebalancing had over 3 years filled about $100k of headroom with LTCG that could have been better used to reduce tax-deferred balances.

We didn't have the complication of managing income for ACA subsidies.

PB-

This is an interesting approach; to tap tax-deferred accounts before taxable accounts. Knowing you, I’m sure you’ve analyzed this so, I’d like to hear what convinced you to choose this route. I’m thinking of it in the larger context of all the choices early retirees (those who retire well before SS eligibility with a multi-year low income window) have to choose from. It makes me think about the old thread about LTCG Capture vs Roth Conversions: http://www.early-retirement.org/for...-instead-of-doing-roth-conversions-90648.html

Very interested in your thoughts.

 

[RetireBy90]

Thank you so much. I had to think about that hard and discuss with DH, but we finally get it. Another benefit to using part of our 401K earlier than we had thought.

That's 3 reasons now:

1) MAGI management for ACA - extend taxable account $$$ over more years
2) reduce RMD hit when our SS and pensions start since we have a fair amount in 401k's/IRA's
3) preserve a bit of extra $ from taxes should one of us pass early (hopefully won't need this "benefit")

Much appreciated!

Along with #1 for ACA, there is also an impact on your Income-Related Monthly Adjustment Amount, or IRMAA.

 

[pb4uski]

PB-

This is an interesting approach; to tap tax-deferred accounts before taxable accounts. Knowing you, I’m sure you’ve analyzed this so, I’d like to hear what convinced you to choose this route. I’m thinking of it in the larger context of all the choices early retirees (those who retire well before SS eligibility with a multi-year low income window) have to choose from. It makes me think about the old thread about LTCG Capture vs Roth Conversions: http://www.early-retirement.org/for...-instead-of-doing-roth-conversions-90648.html

Very interested in your thoughts.

The genesis of my decision was a model that I had for seeing how big my tax torpedo might be and how best to reduce it.

Prior to the decision I was living off of taxable but because my basis was only about 1/2 of current value when I sold equities to rebalance my cash I was generating significant LTCG. There was no tax on the LTCG since we manage our income to the top of the 0% LTCG bracket and that was great... but I realized that each $1 of LTCG ended up being my not being able to do $1 of either Roth conversions or tTRA withdrawals.

Obviously, the best way to minimize the tax torpedo is to minimize tax-deferred balances so I should have been favoring tIRA withdrawals and/or Roth conversions over LTCG once I had penalty-free withdrawals.

Then it struck me that if DW or I pass that our individual account would get a stepped up basis and our joint account will get 1/2 a stepped up basis and that is a huge benefit since our basis is about 1/2 of our values. While LTCG is effectively the same thing, the downside is that any LTCG end up reducing my ability to reduce the tax torpedo.

One key is that we don't need to manage our income for ACA so we have more flexibility and more headroom and flexibility.

So if I had to do it over again in our situation where at retirement at 56 we had 1/2 our nestegg in tax deferred and minimal in tax-free, I would live off of taxable from 56 to 59 1/2 and do Roth conversions to the top of the 12% tax bracket, then shift to leaving taxable along and doing tIRA withdrawals and Roth conversions from 59 1/2 to SS/RMDs to reduce the tax torpedo.

In total retrospect, I probably should have left my 401k at my old employer and starting using tax-deferred money from when I first retired at age 56.... but I wasn't at all thinking about the tax torpedo back then and I rolled my 401k into a tIRA, which moved my date of opportunity from ER at 56 to 59 1/2.

Anywho, that's my story and until someone comes along with a better idea, I'm sticking to it.

 

[SecondCor521]

The stepped up basis thing - that just applies if you are giving $ to your children, right? I looked it up and didn't see that it applied to any other situation. We don't have children so I'm thinking this isn't something that could apply to our situation.

It also applies if you donate appreciated stock to charity.

So if you're charitably inclined and own $100K in stock for which you paid $50K, then you could donate the stock to the charity and take a $100K deduction (unless limited by AGI). The charity could then sell the stock for $100K and realize no capital gains.

At least that used to be the way it worked and I haven't heard of any changes to that part of the tax law (other than the increased standard deduction makes a higher hurdle to get over in any given year for this strategy).

 

[Dtail]

The genesis of my decision was a model that I had for seeing how big my tax torpedo might be and how best to reduce it.

Prior to the decision I was living off of taxable but because my basis was only about 1/2 of current value when I sold equities to rebalance my cash I was generating significant LTCG. There was no tax on the LTCG since we manage our income to the top of the 0% LTCG bracket and that was great... but I realized that each $1 of LTCG ended up being my not being able to do $1 of either Roth conversions or tTRA withdrawals.

Obviously, the best way to minimize the tax torpedo is to minimize tax-deferred balances so I should have been favoring tIRA withdrawals and/or Roth conversions over LTCG once I had penalty-free withdrawals.

Then it struck me that if DW or I pass that our individual account would get a stepped up basis and our joint account will get 1/2 a stepped up basis and that is a huge benefit since our basis is about 1/2 of our values. While LTCG is effectively the same thing, the downside is that any LTCG end up reducing my ability to reduce the tax torpedo.

One key is that we don't need to manage our income for ACA so we have more flexibility and more headroom and flexibility.

So if I had to do it over again in our situation where at retirement at 56 we had 1/2 our nestegg in tax deferred and minimal in tax-free, I would live off of taxable from 56 to 59 1/2 and do Roth conversions to the top of the 12% tax bracket, then shift to leaving taxable along and doing tIRA withdrawals and Roth conversions from 59 1/2 to SS/RMDs to reduce the tax torpedo.

In total retrospect, I probably should have left my 401k at my old employer and starting using tax-deferred money from when I first retired at age 56.... but I wasn't at all thinking about the tax torpedo back then and I rolled my 401k into a tIRA, which moved my date of opportunity from ER at 56 to 59 1/2.

Anywho, that's my story and until someone comes along with a better idea, I'm sticking to it.

Nice explanation.
I am managing monies for the ACA.
However, DGF can do some Roth conversions until we hit 65.
Then will fund most of our spending from TIRA until SS at 70.
401k has a 3.78% current net yield for the Stable Value fund, so no plans to use those monies until RMD time.

 

[RetireBy90]

It also applies if you donate appreciated stock to charity.

So if you're charitably inclined and own $100K in stock for which you paid $50K, then you could donate the stock to the charity and take a $100K deduction (unless limited by AGI). The charity could then sell the stock for $100K and realize no capital gains.

At least that used to be the way it worked and I haven't heard of any changes to that part of the tax law (other than the increased standard deduction makes a higher hurdle to get over in any given year for this strategy).

Not trying to sell for them, but we have funds with Fidelity and it was very simpl and easy to setup a charitable trust with them and fund it as you describe with some Microsoft stock that had doubled since purchase. Press says that the ability to contribute the appreciated stock without claiming cap gains still continues. If you bunch couple or several years of contributions you can itemize one year and then send $$ to charity over next few years and take the new higher standard deduction. Also, press reports that the ability to send RMD amounts directly to charity and not impact income for Medicare or SS income computations.

 

[WestUniversity]

All of our dividends/interest are being reinvested. Currently we have a few years expenses sitting in cash. We also have a monthly auto transfer set up, at our current withdrawal rate, from our InvestCo to our checking account to cover our monthly spending...

 

[MarieIG]

Well, I haven't retired yet, but my withdrawal plan will be TAP & ROLL.

That is tap the IRAs and roll into Roths, between ages 59 1/2 until the change in tax rates: 2026? Thereafter, I will see. The goal is to get as much as possible into the Roths, so as to minimize the tax torpedo, which will be coming the year DH turns 70 1/2. I will use income from the taxable to pay tax on the conversions.

ACA is not a factor.

I will also discuss when to take SS with my accountant, so I will see how that affects my ability to make conversions.

DH, as the higher earner, is also postponing his SS to age 70.

 

[Huston55]

Well, I haven't retired yet, but my withdrawal plan will be TAP & ROLL.

That is tap the IRAs and roll into Roths, between ages 59 1/2 until the change in tax rates: 2026? Thereafter, I will see. The goal is to get as much as possible into the Roths, so as to minimize the tax torpedo, which will be coming the year DH turns 70 1/2. I will use income from the taxable to pay tax on the conversions.

ACA is not a factor.

I will also discuss when to take SS with my accountant, so I will see how that affects my ability to make conversions.

DH, as the higher earner, is also postponing his SS to age 70.

If you’ve not already used this SS calculator from Mike Piper, you may want to before meeting with your accountant. It’s very instructive. For example, it tells us that age 70 is not the optimum age to begin SS. We may still choose age 70 for longevity insurance reasons but, it’s good to know what’s ‘optimum’ based on NPV.

https://opensocialsecurity.com

 

[SecondCor521]

If you’ve not already used this SS calculator from Mike Piper, you may want to before meeting with your accountant. It’s very instructive. For example, it tells us that age 70 is not the optimum age to begin SS. We may still choose age 70 for longevity insurance reasons but, it’s good to know what’s ‘optimum’ based on NPV.

https://opensocialsecurity.com

That's a good site. Note that the answer it gives you depends greatly on the discount rate you choose to assume. The discount rate is hidden under advanced options (tickbox at the top).

 

[Dtail]

If you’ve not already used this SS calculator from Mike Piper, you may want to before meeting with your accountant. It’s very instructive. For example, it tells us that age 70 is not the optimum age to begin SS. We may still choose age 70 for longevity insurance reasons but, it’s good to know what’s ‘optimum’ based on NPV.

https://opensocialsecurity.com

Interesting if I use filing "Married" (not married but monies are), 70 is the maximum, but if using SS discount, then 62 maximizes.
Thus, I have 3 years to know whether the SS issue will be fixed.

 

[DrRoy]

For me step one is to take dividends and capital gain distributions in cash instead of reinvest. As bonds mature I accumulate further cash for the next year's spending. If needed I sell some equities or pull from the Roth.

 

[HI Bill]

PB-

This is an interesting approach; to tap tax-deferred accounts before taxable accounts.

I'm under 59.5, so I'm planning to tap the tax-deferred inherited IRA first...to the tune of $24.4K annually (matches the standard deduction for 2, so no Fed tax), then taking dividends (taxable), then taxable account withdrawals, (keeping the taxable income under $78,750 so there are no LTGC taxes (0% bracket, MFJ), and finally, ROTH principal if needed (not anticipated to be needed for the first few years). The net result of this for me is take-home 'pay' of $100K, while paying less than $1K in Fed taxes.

Point is, every situtation is different. My overall strategy is to take as much from tax-deferred accounts as possible before RMD age and SS kick in around 70.5/70, to lower the future income tax brackets. In my case it also works out that I will pay very little in Fed taxes from age 54-59.5.

 

[Huston55]

I'm under 59.5, so I'm planning to tap the tax-deferred inherited IRA first...to the tune of $24.4K annually (matches the standard deduction for 2, so no Fed tax),

Inherited IRA w/d is mandatory, although $24.4k might be more than you’re required to take.

then taking dividends (taxable), then taxable account withdrawals, (keeping the taxable income under $78,750 so there are no LTGC taxes (0% bracket, MFJ),

Dividends & interest from taxable accounts are mandatory regarding taxation.

and finally, ROTH principal if needed (not anticipated to be needed for the first few years). The net result of this for me is take-home 'pay' of $100K, while paying less than $1K in Fed taxes.

This is the only ‘discretionary’ w/d you list. While I understand your approach to get $100k/yr ‘pay’ with minimal taxes, these w/d discussions are always about what ‘discretionary’ w/d (i.e.: taxable, LTCG capture @ 0% tax, Roth Conversions, Tax Deferred W/D, Roth W/D, etc.)

Point is, every situtation is different. My overall strategy is to take as much from tax-deferred accounts as possible before RMD age and SS kick in around 70.5/70, to lower the future income tax brackets. In my case it also works out that I will pay very little in Fed taxes from age 54-59.5.

This is really the salient point - that every situation is dependent on the expenses, income sources, asset location, asset allocation and cost basis/gains of the individual or couple.

 

[HI Bill]

Inherited IRA w/d is mandatory, although $24.4k might be more than you’re required to take.

Yes, I'm planning to take out ~6 times the RMD value each year before I hit 59.5, so that I can 'deplete' the IRA before I start taking from my 401(k)/IRAs.

 

[pb4uski]

Interesting if I use filing "Married" (not married but monies are), 70 is the maximum, but if using SS discount, then 62 maximizes.
Thus, I have 3 years to know whether the SS issue will be fixed.

Even if money is joint but you're unmarried, using married will give you a bad result... first, it will include spousal benefits if her SS is less than 1/2 of yours, second, it would continue the higher SS even if the person with the higher SS dies.

I would think that for unmarried you need to do separate analyses and add the EPVs if desired.

 

[Dtail]

Even if money is joint but you're unmarried, using married will give you a bad result... first, it will include spousal benefits if her SS is less than 1/2 of yours, second, it would continue the higher SS even if the person with the higher SS dies.

I would think that for unmarried you need to do separate analyses and add the EPVs if desired.

Interesting point.
Her current SSDI is already more than half my projected maximum at 70 y.o., but will check it out as described above.

 

[2177V]

I am retired and I have a diversified portfolio of stocks and bonds with a Vanguard IRA I have one bond fund VFSTX (4 star morningstar) which is low performance but low volatility that I use to withdraw "one entire year of living expense early in the year". I do not like to withdraw monthly because the value of VFSTX may go up and down slightly. I wait until the value of VFSTX is relatively high and then I withdraw one entire year so I do not second guess myself.

I have about 5 years of living expenses in VFSTX because rest of my portfolio is designed for performance. This means the value of my performance portion of my portfolio goes up and down significantly while VFSTX is fairly stable and goes up and down very slightly to ensure some liquidity. My experience: During a crash or bear market, an investor loses liquidity because you have to provide time for your portfolio to recover. This is why liquidity is important to me so I divided my portfolio is a performance portion (stock) and a liquidity portion (VFSTX).

When the market is high, I sell some of my stock shares in the performance portion to buy VFSTX to lock in my gains and to maintain the 5 years of living expenses in reserve. When the market is low, I live off VFSTX until the market recovers because I have 5 years of living expenses to hold me over.

I picked 5 years because "most" bear markets and crashes recovers within 5 years and having more than 5 years in VFSTX affects my overall performance. 5 years is my comfort level to maintain sufficient liquidity while other people may want more or less liquidity depending on how conservative or how aggressive you want to be.

 

[Huston55]

I am retired and I have a diversified portfolio of stocks and bonds with a Vanguard IRA I have one bond fund VFSTX (4 star morningstar) which is low performance but low volatility that I use to withdraw "one entire year of living expense early in the year". I do not like to withdraw monthly because the value of VFSTX may go up and down slightly. I wait until the value of VFSTX is relatively high and then I withdraw one entire year so I do not second guess myself.

I have about 5 years of living expenses in VFSTX because rest of my portfolio is designed for performance. This means the value of my performance portion of my portfolio goes up and down significantly while VFSTX is fairly stable and goes up and down very slightly to ensure some liquidity. My experience: During a crash or bear market, an investor loses liquidity because you have to provide time for your portfolio to recover. This is why liquidity is important to me so I divided my portfolio is a performance portion (stock) and a liquidity portion (VFSTX).

When the market is high, I sell some of my stock shares in the performance portion to buy VFSTX to lock in my gains and to maintain the 5 years of living expenses in reserve. When the market is low, I live off VFSTX until the market recovers because I have 5 years of living expenses to hold me over.

I picked 5 years because "most" bear markets and crashes recovers within 5 years and having more than 5 years in VFSTX affects my overall performance. 5 years is my comfort level to maintain sufficient liquidity while other people may want more or less liquidity depending on how conservative or how aggressive you want to be.

These descriptions are qualitative. What quantitative criteria do you use?

For example, we keep 4+/- yrs in ‘cash’ (CDs/short term bond ladder) for the same reason you keep VFSTX. If, at the end of the year, the S&P500 is flat or up for the year, I consume the current rung for the coming year’s expsenses & sell stock MF to buy/add an outyear rung. If, at the end of the year, the S&P500 is down for the year, I consume the current rung for the coming year’s expenses but, don’t buy/add an outyear rung.

 

[meleana]

We are consulting with a CFP right now about this. You should consider as well- a fee only planner. Just pay for a plan.


Not done yet, but looks like we will be delaying SS until age 70. Take our withdrawals from our taxable accounts until age 70 and also do Roth conversions starting when my husband retires next year at age 66 until age 70 (I am no longer working) when we are required to start the RMD's.