Order of Withdrawal DETAILS

[Midpack]

I’ve read plenty of articles recommending:

• Taxable first, tax deferred second, tax free last OR
• Proportionally from all three (or two if applicable)

I was planning on the latter, but I was evaluating in a vacuum - without factoring in Social Security and especially RMDs and “passive income” from dividends & interest. [First world problems]

I’m still planning to withdraw to minimize tax impact, but now that I’m considering the actual numbers

• SS income (will evolve from 2024-2027, both of us begin at 70 yo),
• “passive” dividends & interest,
• large Roth conversions & IRMAA (mostly before RMDs begin 2027),
• RMDs and
• portfolio % taxable, tax deferred and tax free,

it doesn’t seem as straightforward to plan withdrawals.

Any advice? Maybe I’m making this harder than necessary…

…Soc Sec, RMDs and passive dividends & interest will provide more than we need for spending for the foreseeable future if not to the end - so maybe withdrawal order is moot for us for the foreseeable future? I have taken small withdrawals from cash since I retired in 2011 so the concept of no voluntary withdrawals once Soc Sec & RMDs kick in is hard for me to comprehend…

 

[Dash man]

We’re spending from our taxable accounts while converting deferred into a Roth. We’re reducing the conversions some to lower our IRMAA obligations. Beginning in three years when we’re 70 1/2 all of our charitable donations will be from QCDs. We’ll continue to spend from taxable accounts to let the Roth accounts grow. Most of our taxable income after 70 1/2 will be from dividends and interest, social security and a small pension. Hopefully we’ll be done with IRMAA by then too.
We use the website New Retirement that provides guidance for this.

 

[MdaPetralia]

I’m still planning to withdraw to minimize tax impact, but now that I’m considering the actual numbers

• SS income (will evolve from 2024-2027),
• “passive” dividends & interest,
• large Roth conversions & IRMAA (mostly before RMDs begin 2027),
• RMDs and
• portfolio % taxable, tax deferred and tax free,

it doesn’t seem as straightforward to plan withdrawals.

Any advice? Maybe I’m making this harder than necessary. Soc Sec, RMDs and passive dividends & interest will provide more than we need for spending for the foreseeable future if not to the end - so maybe withdrawal order is moot for us for the foreseeable future?

Midpack,
The way I look at it, unless you delay taking SS or shift-around your taxable investments, your are already being "forced" to take income from SS, RMD's, dividends & interest. i.e. no withdraw order to pick from here. Then after adding up/estimating what this income will be for a given year, using your favorite tax software/calculator of choice (I use https://engaging-data.com/tax-brackets), you can then determine where you do have choices to take additional income (ROTH conversions, tax deferred, capital gains, etc) while minimizing taxes.

 

[pb4uski]

The rub with the taxable first, tax-deferred second, tax-free last approach is that it doesn't consider that if taxable includes highly appreciated assets eligible for a stepped-up basis then at your death it changes from taxable to tax-free... unless your income is so low that you are in 0% LTCG bracket, which I suspect isn't you.

I don't think we need to fret too much on withdrawals from tax-deferred or tax-free before RMD age... just do Roth conversions to a target level that is tax optimal and make all withdrawals from either taxable or tax-free... no need for tax-deferred withdrawals. After RMD age then you have RMDs from tax-deferred accounts.

Before RMD age, if in a given year you end up having to make tax-free withdrawals it just makes that amount of your Roth conversion a tax-deferred withdrawal that year. IOW if I convert $100 and pay the tax from taxable funds and then later that same year withdraw the $100 it is no different than if I just a $100 tax-deferred withdrawal.

When I have appreciated equities in taxable, my plan was to do annual conversions to the top of the 12% tax bracket and live off tax-free qualified dividends and Roth withdrawals, leaving the unrealized gains in equities to get a stepped up basis and ultimately become tax-free.

Now that I have shifted to a 0/100 AA, until I am RMD age I'll be using taxable first, annual Roth conversions to the top of the 12% tax bracket and then if needed, Roth withdrawals. After RMD age then probably RMDs, income on taxable accounts and a much smaller amount fo Roth conversions for a while.

 

[Texas Proud]

What pb4uski said...


But, I have been looking at my situation as minimizing lifetime taxes and maximizing current benefits...


Up until this year the ACA credit was huge for me so I wanted to have the lowest taxable income.. so had to take from ROTH.. not normally where someone would take money... (oh, adding... I took from the taxable account at first until I ran out of cash and low or no gain funds to sell... that took a few years)



This year I converted my company stock to regular tax account so will have a bill tax bill... so AGAIN, taking from ROTH...


Next year I will be doing some ROTH conversion so the regular IRA will be the primary cash source... plus some sale of the company stock as I have too much of that...


SOOO, everybody is different as they have different motivations for doing what they are doing...

 

[SevenUp]

Withdrawing/converting from traditional accounts so that your marginal tax rate is now about the same as what you expect it to be when you have "forced" (as MdaPetralia put it) income such as SS, pension, RMDs, etc. is a reasonable approach.

 

[MdaPetralia]

... unless your income is so low that you are in 0% LTCG bracket

This is my situation.

Even with dividends + interest + some ROTH Conversions already this year, I still have room in the 0% LTCG while in the 12% tax bracket. My dilemma is do I do some additional ROTH Conversions (at 12% tax) or do I sell some highest appreciated assets until I reach the top of the 0% LTCG bracket (taxable income of $89,250 FMJ)? My wife and I are 18 years away from RMD's and step-up in basis at death is not important to us.

I'm leaning towards selling some highly appreciated mutual funds at 0% LTCG as I'm thinking 0% tax on these gains is better than paying 12% tax on additional ROTH conversions. Additionally, I can reallocate these gains to contribute to my living expense buckets (4 to 5 years out) in more stable/guaranteed investments (e.g. T-Bills, CD's).

 

[audreyh1]

Remember that in community property states, joint accounts get a stepped up basis for both when one spouse dies.

 

[Souschef]

For me, it is a first world problem. Between RMD's and 85% of SS, my taxable income is $145K before interest, dividends, CG, etc.
I reduce it somewhat by QCD's.

 

[MdaPetralia]

Remember that in community property states, joint accounts get a stepped up basis for both when one spouse dies.

Unfortunately, I don't live in a community property state, however, if I did, that would probably change my decision.

 

[RetireAge50]

We retired at age 50 so have been spending down after tax money and Roth contributions to take advantage of government healthcare. We also have a small pension and a 72t which takes care of the low tax brackets. At age 65 when everything kicks in almost all income will be taxable.

 

[harley]

I don't think I managed this optimally, but hopefully it won't make a major impact on the outcome. I started out 16 years ago living off after tax investments, and paying basically no taxes. I was able to sell some stocks with significant gains at the 0% bracket. But then I ran into a couple of situations (house buying) where I wanted a mortgage but wasn't able to qualify for them because of little to no income, despite having a vault full of pre-tax loot. I tried, but in the close post-2008 borrowing world it was really hard to find anyone that would lend based on assets. So I ended up buying a couple of rentals (thanks to a fellow forum member for the advice), plus started a side gig. This allowed me, in a couple of years, to get mortgages that are currently < 3% that I plan to hold onto for as long as possible. But it also pushed me into a higher income bracket and I lost the 0% CG option. I switched to doing Roth conversions, which has been a great move, although the Roth money is intended more as an inheritence than for our use. But it's good to know it's there if we need it. I wish I had spent more time doing smaller Roth conversions earlier rather than just enjoying the low taxes. The ones that I've done up to the top of the 22% bracket have been good things, although writing those giant checks to Uncle Sam every 3 months is physically painful for a died-in-the-wool cheapskate like me.

 

[Exchme]

We have a big chunk of taxable that has very little unrealized gains so for us it is an easy decision, spend down taxable first.

Then with taxable reduced in size, its dividends aren't so high, so that when we receive SS, not all the SS is taxed. That creates a barrier to further Roth Conversions, so our situation simplifies to paying for the Roth Conversions from taxable and getting them "done" prior to claiming SS. Where "done" means that the marginal tax rates during RMDs will hopefully be pretty close.

Of the consumer grade models, I think only Pralana Gold would come close to having the power for this analysis. It has an optimization routine that checks for the best order of what to draw down, but the optimizer won't see strategies like using a bit of an account here or there. However, it will let you test that kind of experiment by specifying an amount to pull from a tax advantaged account and which years to do it. I pointed out to the owner that the program is missing the step-up in basis upon death of the first spouse and he told me he would add it to the 2024 version (which will be web based instead of an Excel sheet).

 

[Dtail]

We are spending down taxable along with some tax deferred and some Roth conversions, all with the ACA concept in mind.

 

[SevenUp]

I'm thinking 0% tax on these gains is better than paying 12% tax on additional ROTH conversions.

Depends on what marginal tax rate you expect in the future. If the 12% is temporary and you expect 22% or more in the future, getting the money into Roth now will be slightly better than tax gain harvesting. See the '0% LTCG or t->R' tab in the Excel case study spreadsheet to consider your particular situation.

 

[SecondCor521]

This Kitces article discusses the issue in a reasonable way. Most of the strategies outlined here on this thread seem to mostly fit into its framework.

https://www.kitces.com/blog/tax-eff...strategies-to-fund-retirement-spending-needs/

It looks like this slide deck is related and may have some additional info:

https://www.kitces.com/wp-content/u...n-Retirement-FPA-DFW-May-16-2019-Handouts.pdf

I'm 54, FIREd at 46, single, with three kids in their 20s. I am spending from taxable now and doing Roth conversions up to the amount necessary to make my marginal rate now equal my maximum marginal rate between now and about age 85 which is my current 50/50 longevity number. I may start a modest 5 year SEPP program in January.

 

[MdaPetralia]

Depends on what marginal tax rate you expect in the future. If the 12% is temporary and you expect 22% or more in the future, getting the money into Roth now will be slightly better than tax gain harvesting.

Yes, 12% is temporary until I start SS (targeting 13 years from now at age 70) and RMD's (18 years from now at age 75). Not being able to foresee what tax rates/laws will be that far in advance, and with a bit of time on my side, I have been doing smaller ROTH conversions (in 12% bracket while keeping 0% LTCG) rather than larger (i.e. taking small bites out of the elephant rather than big bites). And like Harley said, it's painful paying Uncle Sam (today) when you have a choice not too (but may get clobbered later).

See the '0% LTCG or t->R' tab in the Excel case study spreadsheet to consider your particular situation.

I will certainly take a look at this. Thanks!

 

[MdaPetralia]

But then I ran into a couple of situations (house buying) where I wanted a mortgage but wasn't able to qualify for them because of little to no income, despite having a vault full of pre-tax loot. I tried, but in the close post-2008 borrowing world it was really hard to find anyone that would lend based on assets.

I was able to get a mortgage in 2022 with little income based on something called an "asset depletion" program. It's a method of qualifying for a mortgage if you have more than enough assets but not enough income.

...although writing those giant checks to Uncle Sam every 3 months is physically painful for a died-in-the-wool cheapskate like me.

+1

 

[HI Bill]

I didn't see anyone mention a spending curve.

For me, there are two main reasons to keep taxes low in the initial years before age 59.5, and before RMDs, and to let then rise at 70 when (if) one starts SS then, and at 73, when RMDs kick in.

First, is the desire to spend more in my younger years (55-70). Second, is my desire to take advantage of the 0% LTCGs tax rate as long as possible. This leaves the tax-deferred accounts growing, but rapidly depletes the taxable accounts. The result of this strategy helps in the earlier years with increasing ACA subsidies (potentially) before Medicare, keeps Federal taxes fairly low, and allows for maximum spending earlier. After 70/RMD age, the tax torpedo will likely hit me, as 85% of SS, and 100% of tax-deferred investments become taxable. To lessen this torpedo, I've been taking ~1/3 of my withdrawals from my tax-deferred assets (Rule of 55).

But as my spending drops (Bernicke's Reality Retirement Plan), increases in taxes won't hurt much, especially as I can use a portion of SS to pay the extra taxes. Note that my 'strategy' is possible as, I have no heirs after my wife. Of course, this plan is highly dependent on RE age, age to take SS, WR, and net invested assets level.

 

[TheWizard]

When I retired in 2013, I had large tax-deferred and minimal taxable and Roth accounts.
So I withdrew from tax-deferred 403(b) for living expenses and Roth conversions.

Now at age 73, my taxable and Roth accounts have grown to over $500k combined. My taxable account will keep growing indefinitely since it's the only place I can put excess unearned income...

 

[DrRoy]

So far I've been doing your first option.

 

[rk911]

We're in a position where we don't need to make withdrawals from our savings or investment accounts as our pensions and SS are more than enough to handle our expenses month-to-month. That being said if I were in the OP's shoes I'd defer and delay taxes for as long as possible by withdrawing from my Roth accounts first, then traditional IRAs and finally the post-tax accounts. Converting my tIRAs to Roths might be an additional strategy as the tax man is gonna getcha sooner or later.

 

[someguy]

Remember that in community property states, joint accounts get a stepped up basis for both when one spouse dies.

Is there a reliable list of each states' status for this in the context of stepping up the basis of joint accounts for a surviving spouse?

 

[SnowballCamper]

Minimize taxes means to minimize income (at least to the point where it isn't taxed), so I prefer to think in terms of leveling income for the foreseeable future. What income can I control now to prevent excess income in the future? For my situation that meant starting a SEPP from the tax deferred account.

 

[audreyh1]

Is there a reliable list of each states' status for this in the context of stepping up the basis of joint accounts for a surviving spouse?

No idea. I just know that we live in a community property state and our joint accounts and house, vehicle are registered as joint with right of survivorship.