Order in which to withdraw funds

[smooch]

I know I've seen this topic here before, but a search did not return it in one thread. When one begins to withdraw money in retirement, is there an order among taxable accounts, 403(B) accounts, ROTH IRAs and Traditional IRA's?

 

[retire@40]

I think there may be lots of options for this, depending on how diversified you are, the proportion of taxable accounts to non-taxable accounts, your risk tolerance, etc.

One approach may be to take enough out so you stay within a tax bracket of your choice.  You may already be in the 15% bracket, so you take out enough from different investment account combinations to stay within that 15% bracket, whether you need the money or not.  Or if you are in the 0% bracket, you take out enough to stay $1 short of the first tax bracket.

 

[cute fuzzy bunny]

Look at the orp calculator at
http://www.i-orp.com/about.html

It'll ask you a bunch of firecalc type questions (and then some) and produce a detailed set of reports, one of which is a withdrawal report which will show you where to withdraw from first. Some retirement vehicles have minimum withdrawals that start at certain ages and some dont, some have tax implications and some dont. ORP figures that out for you and explains why you're taking what from where.

It can be re-run periodically to replace the guesses at future returns with reality and firm up the numbers.

 

[OldAgePensioner]

Roth's came along too late for me but I would hold it the longest. It's appreciation is never taxed and it can be left to an heir with the same appreciation benefit (I think).

 

[Ed_The_Gypsy]

Thwarting the weasel?

Perhaps this is the right place to ask this question. I do not believe that I have seen this discussed before. Does it make sense or not?

Scott Burns has pointed out that withdrawals from an IRA are taxed as income and that there is a point where SS payments plus income goes through a 50% marginal tax rate, which may be avoidable. Unless I continue to work (sad but possible), this will not be a problem for me, but many will be in this situation. I also have in mind Scott Adams’ Weasel Effect (?) that says when a certain amount of money accumulates in one place, a weasel magically appears and takes it away.

Consider the following to prevent an overlap of SS and income from IRAs:
a) delaying SS payments until 72,
b) pulling IRA assets out between the age of 60 (if memory serves, when unrestricted access begins) and 72, to be re-invested to take advantage of the lower tax rate on capital gains.

I suppose it depends on how big the normal withdrawals would be and how long one expects to live. We need Gummy’s crystal ball. Still, one needs a long-term strategy.

Has anyone looked at this?

Thanks.

Gypsy

 

[Cut-Throat]

Ed,

Don't think too hard on this.

Taxes are a very nice problem to have when you are retired. Eat well, laugh often and pay your taxes.

 

[OldAgePensioner]

Ed,
I hope by Gypsy you mean traveller. That's all good.

I have always heard these two things as nearly gospel

1. Leave tax-deffered (401k,IRA) to grow as long as you can.
2. Take SS as soon as you can.

No expert here by any means but I read that so many time.

I'm looking to sell stocks and take capital gains taxed at 5% from 2005-2010 by staying in the 15% tax bracket by hook or crook.

 

[Mr._johngalt]

Ed,

Don't think too hard on this.

Taxes are a very nice problem to have when you are retired. Eat well, laugh often and pay your taxes.

It was a nice surprise to find I am paying no income taxes at any level in ER.
I hope to be able to find a way to continue this indefinitely.

JG

 

[unclemick]

I play a lot with ORP using different inputs as to SS, Roth conversions, taxable etc to see what order falls out.

Roth came basically too late for us also - 85% trad IRA.

So it looks like - given our past 12 years in ER - and my Norwegian widow tendencies - ignore the the calculator and go income streams rather than spend taxable first. Any excess each year do a mini Roth conversion up to the tax bracket I can stand.

!. non cola pension 2. early SS 3. div/interest from IRA and RMD at 70 1/2  4. dividends from taxable portfolio.

Should I not croak precisely at 84.3 will have a small Roth compounded over 15 - 23 years and some principle.

Tax wise - this may not be the best - but it fits our living style.

Remember after 12 years - I'm an old phart 61/62 this year - so SS and starting to tap IRA is lagniappe.

 

[Mr._johngalt]

Ed,
I hope by Gypsy you mean traveller.  That's all good.

I have always heard these two things as nearly gospel

1.  Leave tax-deffered (401k,IRA) to grow as long as you can.
2.  Take SS as soon as you can.

No expert here by any means but I read that so many time.

I'm looking to sell stocks and take capital gains taxed at 5% from 2005-2010 by staying in the 15% tax bracket by hook or crook.

They are "nearly gospel" to me. Good advice for anyone IMHO.

JG

 

[Ed_The_Gypsy]

Cut-Throat,

You are spot-on. Personally, I will be way below the radar on taxes, but the question was interesting.

Unclemick rev 2,

I like your approach.

th,

Thanks for the ORP link! I had not seen this before.

Cheers,

Gypsy,
Still laboring in the fields of mammon.