Opposite Conventional Wisdom Strategy

S

Safe Harbour

Recycles dryer sheets
Joined
Dec 11, 2007
Messages
112
Location
Greenville
I know everyone's situation is different, but I'm just trying to wrap my head around the withdrawal advice I get from the Income Strategy app. When I compare outcomes of Conventional Wisdom Withdrawal (Taxable -> Tax Deferred -> Tax Free) and Opposite Conventional Wisdom Withdrawal (Tax Deferred -> Taxable -> Tax Free)

I'm 65 and I get 23% more value from the Opposite Conventional Wisdom Withdrawal. This is hard for me to understand. It is apparently due to effective tax rates on the different accounts. And taking to the top of my tax bracket (24%) to reduce RMDs. The taxable account being made of after tax contributions, capital gains, or annual pay-out on income being lower than the personal income tax on the RMD peaking above 24%.

The principle's behind Income Strategy have published a couple of paper on their finds, this being one. And another one. And here's one from T Rowe Price.

I would say that it's almost impossible to calculate yourself so the Income Strategy App seems make the calculations that I couldn't.

I'm wondering what others thoughts are on this and who's following the Opposite Conventional Wisdom Withdrawal Strategy?

Note that the strategy is also saying it's better to spend the ROTH first, but I don't believe that's the case when you plan to leave it to your heirs rather than spend it. The tax advantage to them is significant. So I have kept my ROTH and highly appreciated stocks and funds in the taxable account to pass on.
 
I have been using taxable first, and doing some Roth conversions up to the second bracket point.
 
DrRoy said:
I have been using taxable first, and doing some Roth conversions up to the second bracket point.
Click to expand...


+1 - Just updated some info in the Fido tool and read a note they had that talked about using a mix of taxable and tax deferred. They had 2 examples that showed low taxes while taking from the taxable account then a bump up when these were exhausted and taking from the tax deferred. The note suggested it would be better to take a mix to smooth out the tax hit and showed lower total tax hit by keeping the rate lower. Something to think about if you plan to use both taxable and tax deferred. However, I think these kind of decisions are very unique to each situation. If you don't plan to spend all taxable and tax deferred then spending tax deferred first would allow more of appreciated taxable assets to pass with stepped up basis and avoid taxes.
 
I used Income Strategy for a couple months and didn't get as much variation in strategies as the OP has, so I decided to stick with my strategy of living off of taxble accounts and doing Roth conversions to the top of the 12% tax bracket from now until my SS and RMDs begin to pare down our tax deferred accounts somewhat.

Once my SS begins we'll be close to the top of the 12% tax bracket and RMDs will push us into the 22% tax bracket.

IIRC, Midpack did a lot of work and analysis with Income Strategy, so perhaps he'll be along to comment... if not, OP could PM him.
 
Yeesh, good luck figuring it out. I’ll just leave it to my Vanguard CFP.
 
pb4uski said:
I used Income Strategy for a couple months and didn't get as much variation in strategies as the OP has, so I decided to stick with my strategy of living off of taxble accounts and doing Roth conversions to the top of the 12% tax bracket from now until my SS and RMDs begin to pare down our tax deferred accounts somewhat.

Once my SS begins we'll be close to the top of the 12% tax bracket and RMDs will push us into the 22% tax bracket.

IIRC, Midpack did a lot of work and analysis with Income Strategy, so perhaps he'll be along to comment... if not, OP could PM him.
Click to expand...

Thanks, I would like to learn what he found. I'll search for his threads. I used Income Strategy about a year ago and found it couldn't do what I wanted with my allocation and accounts. They worked on it and I found it more interesting this time.
 
Safe Harbour said:
Thanks, I would like to learn what he found. I'll search for his threads. I used Income Strategy about a year ago and found it couldn't do what I wanted with my allocation and accounts. They worked on it and I found it more interesting this time.
Click to expand...

I believe this is the thread you are looking for.
 
Safe Harbour said:
I know everyone's situation is different, but I'm just trying to wrap my head around the withdrawal advice I get from the Income Strategy app. When I compare outcomes of Conventional Wisdom Withdrawal (Taxable -> Tax Deferred -> Tax Free) and Opposite Conventional Wisdom Withdrawal (Tax Deferred -> Taxable -> Tax Free)

I'm 65 and I get 23% more value from the Opposite Conventional Wisdom Withdrawal. This is hard for me to understand. It is apparently due to effective tax rates on the different accounts. And taking to the top of my tax bracket (24%) to reduce RMDs. The taxable account being made of after tax contributions, capital gains, or annual pay-out on income being lower than the personal income tax on the RMD peaking above 24%.

The principle's behind Income Strategy have published a couple of paper on their finds, this being one. And another one. And here's one from T Rowe Price.

I would say that it's almost impossible to calculate yourself so the Income Strategy App seems make the calculations that I couldn't.

I'm wondering what others thoughts are on this and who's following the Opposite Conventional Wisdom Withdrawal Strategy?

Note that the strategy is also saying it's better to spend the ROTH first, but I don't believe that's the case when you plan to leave it to your heirs rather than spend it. The tax advantage to them is significant. So I have kept my ROTH and highly appreciated stocks and funds in the taxable account to pass on.
Click to expand...

THis is one reason I don't use a lot of the calculators, and because our pensions cover all basic expenses. We plan to leave out two IRAs to our two boys. Told them it would be 'the last thing we spend if we need to'. I know using Roths and taxable can help manage cash flow but we just have separated out the Roths in our planning (but is is there for emergencies!). Now it looks like there there could be a good bit more if we don't run up a lot of EOL expenses.
 
I've been pulling about equal from taxable equities and IRA equities each year. I leave the muni bonds alone. Also collecting dividends from the equities and interest from the bonds to spend.
 
Also on the Opposite Conventional Wisdom Path

Safe Harbour,

DW and I are also on an Opposite Conventional Wisdom path. Our generous military pension starts us in the 22% tax bracket, and once SS arrives, our taxable income will be pushing the 24% tax bracket. As a consequence, Roth conversions right now offer little to no benefit for us. If I had the chance to do our investment choices all over again, I would have beefed up my past Roth contributions and reduced the traditional contributions; since that's impossible, DW and I are happy to deal with the first world problem of having trad IRAs significantly larger than our Roths.

I've found that leveling out our income through our entire retirement is the best path for us, so we will aggressively draw down our traditional IRAs/401k/etc. starting next year before SS starts at 67. Doing so drastically reduces our future RMDs, keeping us in the 22% bracket indefinitely. All other options leave us with huge RMDs that put us in future 24% or higher tax brackets.

This Opposite Conventional Wisdom plan also offers us the following advantages:
1 - If DW or I should pass prematurely, it minimizes the pain of the surviving spouse going from MFJ to Single.
2 - Several of our DD's and their significant others are doing very well financially, so if we don't spend everything before we go, we prefer to will them Roths, not trad IRAs, to maximize their inheritances.
3 - Minimizes our IRRMA hit for ages 65 and later.

I have modeled our situation out in detail in Pralana Gold, and found that their optimized withdrawal strategy is after tax - tax deferred - tax free. But when I look at the portfolio totals resulting from Pralana Gold's optimized recommendation, the tax deferred doesn't reflect the inevitable tax bite coming when we take distributions. When I adjust the tax deferred accounts for the anywhere from 24% or more future tax bite, the opposite conventional wisdom and conventional wisdom approaches are within 2-3% of each other.

And since you can't predict the age of you or DW's demise (every model demands a "when will you and DW die" input), following the Opposite path postures DW and I for tax success whether we both live a long time or not.

So, you're not alone in finding the Opposite Conventional Wisdom approach the best.

Good luck in figuring out your best path moving forward.
 
Schenbew:
If you look at 'effective dollars' in Pralana Gold in the Plan Roth Conversion tab, it will apply your lifetime average marginal tax rate to your remaining t-IRA.

Safe Harbour:
There is something odd in the conclusion that you can get nearly a 24% increase by clever withdrawal strategies. I'm not familiar with that program, but understand it to be an adviser level tool, so I believe it is answering the question you asked, but would bet there is something about the question or the comparison basis that resulting in an apples to oranges comparison somewhere.

Using Roth money first can potentially help if you have a lot of existing capital gains as withdrawing and taking those gains are new lifetime taxes (since there is a step up basis on the taxable account when inherited), but it would require a lot of asset appreciation to for the saved capital gains taxes to make a big difference. Also, somewhat counteracting the savings in early years is that after RMD age is reached, leaving the taxable large means it is generating extra taxable dividends each year that you may not need.

If you have enough assets to justify Roth Conversions in to the 24% bracket, then an optimized Roth plan can give you a nice benefit and I suspect that the Roth benefit is being added in, but even so, I'm struggling to understand how such a large boost is possible.
 
Exchme said:
Schenbew:
If you look at 'effective dollars' in Pralana Gold in the Plan Roth Conversion tab, it will apply your lifetime average marginal tax rate to your remaining t-IRA.

Safe Harbour:
There is something odd in the conclusion that you can get nearly a 24% increase by clever withdrawal strategies. I'm not familiar with that program, but understand it to be an adviser level tool, so I believe it is answering the question you asked, but would bet there is something about the question or the comparison basis that resulting in an apples to oranges comparison somewhere.

Using Roth money first can potentially help if you have a lot of existing capital gains as withdrawing and taking those gains are new lifetime taxes (since there is a step up basis on the taxable account when inherited), but it would require a lot of asset appreciation to for the saved capital gains taxes to make a big difference. Also, somewhat counteracting the savings in early years is that after RMD age is reached, leaving the taxable large means it is generating extra taxable dividends each year that you may not need.

If you have enough assets to justify Roth Conversions in to the 24% bracket, then an optimized Roth plan can give you a nice benefit and I suspect that the Roth benefit is being added in, but even so, I'm struggling to understand how such a large boost is possible.
Click to expand...

+1. I am a big proponent of optimizing such details, but discussions here have convinced me that, for the most part, we are nibbling around the edges. 23% seems like a BIG win. Too big?

I am sorry that you (the OP) were not able to understand the advice you were given or to replicate their calculations. It would have been interesting to look into.
 
schenbew said:
Safe Harbour,

DW and I are also on an Opposite Conventional Wisdom path. Our generous military pension starts us in the 22% tax bracket, and once SS arrives, our taxable income will be pushing the 24% tax bracket. As a consequence, Roth conversions right now offer little to no benefit for us. If I had the chance to do our investment choices all over again, I would have beefed up my past Roth contributions and reduced the traditional contributions; since that's impossible, DW and I are happy to deal with the first world problem of having trad IRAs significantly larger than our Roths.

I've found that leveling out our income through our entire retirement is the best path for us, so we will aggressively draw down our traditional IRAs/401k/etc. starting next year before SS starts at 67. Doing so drastically reduces our future RMDs, keeping us in the 22% bracket indefinitely. All other options leave us with huge RMDs that put us in future 24% or higher tax brackets.

This Opposite Conventional Wisdom plan also offers us the following advantages:
1 - If DW or I should pass prematurely, it minimizes the pain of the surviving spouse going from MFJ to Single.
2 - Several of our DD's and their significant others are doing very well financially, so if we don't spend everything before we go, we prefer to will them Roths, not trad IRAs, to maximize their inheritances.
3 - Minimizes our IRRMA hit for ages 65 and later.

I have modeled our situation out in detail in Pralana Gold, and found that their optimized withdrawal strategy is after tax - tax deferred - tax free. But when I look at the portfolio totals resulting from Pralana Gold's optimized recommendation, the tax deferred doesn't reflect the inevitable tax bite coming when we take distributions. When I adjust the tax deferred accounts for the anywhere from 24% or more future tax bite, the opposite conventional wisdom and conventional wisdom approaches are within 2-3% of each other.

And since you can't predict the age of you or DW's demise (every model demands a "when will you and DW die" input), following the Opposite path postures DW and I for tax success whether we both live a long time or not.

So, you're not alone in finding the Opposite Conventional Wisdom approach the best.

Good luck in figuring out your best path moving forward.
Click to expand...

Hey Schenbew,

Thanks this was most helpful. It confirms I need to consider this as having merit. I suspect I'll find you're right on with the savings. ROTH's don't help me at all, as you said. But taking tax deferred now reduces RMDs from scary levels to nothing, giving 1/6th of the savings in taxes. Then leaving a large untaxed capital gains in the Taxable account for a step-up inheritance gives another good chunk. Taxable account is probably >2/3rds of my funds and 1/2 of that is capital gains which we shouldn't need.

I plan to meet with an Income Strategy consultant (it's $120 per 1/2 hour) to see what kind of insight they can provide. I may try some basic modeling or maybe another software like "Pralana Gold". But it is too complex to model completely for me.

I'll let you know what I find out but I would appreciate any other "Opposite Conventional Wisdom" withdrawers comments? Or anyone who analyzed "OCW" and rejected it, as to why?
 
Safe Harbour said:
Hey Schenbew,

Thanks this was most helpful. It confirms I need to consider this as having merit. I suspect I'll find you're right on with the savings. ROTH's don't help me at all, as you said. But taking tax deferred now reduces RMDs from scary levels to nothing, giving 1/6th of the savings in taxes. Then leaving a large untaxed capital gains in the Taxable account for a step-up inheritance gives another good chunk. Taxable account is probably >2/3rds of my funds and 1/2 of that is capital gains which we shouldn't need.

I plan to meet with an Income Strategy consultant (it's $120 per 1/2 hour) to see what kind of insight they can provide. I may try some basic modeling or maybe another software like "Pralana Gold". But it is too complex to model completely for me.

I'll let you know what I find out but I would appreciate any other "Opposite Conventional Wisdom" withdrawers comments? Or anyone who analyzed "OCW" and rejected it, as to why?
Click to expand...

Where does one find a competent "Income Strategy consultant"? My CPA is useless on this sort of thing though good on our taxes. I've often thought I need at least ONE sit-down for a forward-looking plan. I have many of the issues discussed here - primarily too much in 401(k) such that RMDs WILL become an issue if I don't start soon. $240/hour is certainly in line with a highly trained individual whom I assume has software to run the numbers - quickly.
 
There is a subset of CPAs that specialize in personal financial planning... I think that would be your best bet. Last link is how to find CPA/PFS in your area.

The Personal Financial Specialist (PFS) credential allows CPAs to demonstrate their knowledge and expertise in personal financial planning. Whether a CPA specializes in personal financial planning with their clients or interacts with other financial planning professionals, the CPA/PFS credential adds credibility. CPA/PFS credential holders have a specific experience, education and examination requirement that sets them apart from other CPAs and financial planners. ...
Click to expand...

https://www.aicpa.org/forthepublic/financial-planning-resources.html

https://account.aicpa.org/eWeb/dynamicpage.aspx?webcode=referralwebsearch
 
pb4uski said:
There is a subset of CPAs that specialize in personal financial planning... I think that would be your best bet. Last link is how to find CPA/PFS in your area.



https://www.aicpa.org/forthepublic/financial-planning-resources.html

https://account.aicpa.org/eWeb/dynamicpage.aspx?webcode=referralwebsearch
Click to expand...

Thanks. Looks like there are at least 4 on Oahu. I'm more interested right now in planning for one of us surviving - thus no longer "married - filing jointly" It's all part of potential estate planning. I think right now, I'm comfortable with our spend-down strategy (which of late has not been keeping up with Mr. Market.):cool:
 
Koolau said:
Thanks. Looks like there are at least 4 on Oahu. I'm more interested right now in planning for one of us surviving - thus no longer "married - filing jointly" It's all part of potential estate planning. I think right now, I'm comfortable with our spend-down strategy (which of late has not been keeping up with Mr. Market.):cool:
Click to expand...

Hey Koolau, Income Strategy specializes in withdrawal strategies. Their software is online and only $20/moth or $50 for the gold package. You can use it for a month then go back a year later and do again. They have online consultation/advice for $120/0.5 hour. I am about to try a consultation and will report back how it was. Gary
 
Koolau said:
Thanks. Looks like there are at least 4 on Oahu. I'm more interested right now in planning for one of us surviving - thus no longer "married - filing jointly" It's all part of potential estate planning. I think right now, I'm comfortable with our spend-down strategy (which of late has not been keeping up with Mr. Market.):cool:
Click to expand...
I have a plan, and I think of it as something that should change each year as the family situation evolves. For me the survivor aspect is a major area of focus. In each decision in the plan, I think of the present and future as I modify a statement. I think this is necessary as a plan that's prepared today by a third party won't necessarily fit what IS at the end of next year, etc.

I've always included her in each aspect of this plan. So there are a few illustrations as well as words to help her continue to fish when we no longer go fishing together.

For a long time I read, and analyzed, and ran calculators. Then repeat. But I now believe more needs to be considered on the organic side of "things." The survivor will no doubt encounter a lot of voices and will have to make decisions that weren't in the plan.

So I have tax expert, bill expert, etc. selected, and we're all on the same page. I always go back to the "blue book" on my shelf and update it when necessary.
 
Safe Harbour said:
Hey Koolau, Income Strategy specializes in withdrawal strategies. Their software is online and only $20/moth or $50 for the gold package. You can use it for a month then go back a year later and do again. They have online consultation/advice for $120/0.5 hour. I am about to try a consultation and will report back how it was. Gary
Click to expand...

Thanks! I'll take a look. I AM more of a sit-down-with-an-expert type of guy, but I know that costs a lot more. Aloha
 
Safe Harbour said:
Hey Koolau, Income Strategy specializes in withdrawal strategies. Their software is online and only $20/moth or $50 for the gold package. You can use it for a month then go back a year later and do again. They have online consultation/advice for $120/0.5 hour. I am about to try a consultation and will report back how it was. Gary
Click to expand...


Thanks for that nugget of information. How difficult is it to restart after a year? ie. Do you have to enter all the information & customization again or can you import it? And even if you have to start from scratch, is the effort onerous?
 
walkinwood said:
Thanks for that nugget of information. How difficult is it to restart after a year? ie. Do you have to enter all the information & customization again or can you import it? And even if you have to start from scratch, is the effort onerous?
Click to expand...

It seemed to be pretty straight forward. The software connects to your accounts (if I remember through Plaid). So no work that way. Just have to make sure to note all your settings from previous sessions and reset them. Takes an hour or two to get back into remembering and resetting everything. Since I'm only doing it for 1 month a year, I have been taking the gold package.
 
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