Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Question about which account to draw funds from
Old 05-21-2020, 10:02 PM   #1
Recycles dryer sheets
 
Join Date: Dec 2016
Posts: 343
Question about which account to draw funds from

I'm 53 now. I currently take money from my taxable brokerage account every year to pay my expenses. I also have an IRA. My plan is to take SS at age 70.



My question is ---would it make sense for the years between the age 59 and 1/2 until 70 to take money out of the IRA to pay expenses as opposed to taking money from the taxable account? The reason I ask is that if I continue to take money , throughout my 60's, from the taxable when I hit 70 my tax rate will shoot up dramatically with the RMD requirement for the IRA and SS.


Thanks
__________________

FREE866 is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 05-21-2020, 10:07 PM   #2
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 25,717
Yes.

In fact, it might make sense.. if you qualify... to do some in 2020 since they are waiving early withdrawal penalties and get a head start on it.

https://www.forbes.com/advisor/retir...ules-covid-19/
__________________

__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.

Retired Jan 2012 at age 56...target 65/35/0 AA TBD
pb4uski is offline   Reply With Quote
Old 05-21-2020, 10:11 PM   #3
Recycles dryer sheets
 
Join Date: Dec 2016
Posts: 343
Quote:
Originally Posted by pb4uski View Post
Yes.

In fact, it might make sense to do some in 2020 since they are waiving early withdrawal penalties and get a head start on it.

haha
okay. Yeah, that is what I was thinking. Although I would be reducing the amount of money that would be growing tax deferred every year. Not sure if there is really a way to quantify the benefit of that.
Thanks.
FREE866 is offline   Reply With Quote
Old 05-21-2020, 10:11 PM   #4
Recycles dryer sheets
 
Join Date: Jul 2014
Location: Undisclosed
Posts: 292
Are you doing Roth conversions now?
N02L84ER is offline   Reply With Quote
Old 05-21-2020, 10:14 PM   #5
Recycles dryer sheets
 
Join Date: Dec 2016
Posts: 343
Quote:
Originally Posted by pb4uski View Post
Yes.

In fact, it might make sense.. if you qualify... to do some in 2020 since they are waiving early withdrawal penalties and get a head start on it.

https://www.forbes.com/advisor/retir...ules-covid-19/

Looks like I would not qualify as these are the requirements:

  • Being diagnosed with COVID-19
  • Having a spouse or dependent diagnosed with COVID-19
  • Experiencing a layoff, furlough, reduction in hours, or inability to work due to COVID-19 or lack of childcare because of COVID-19
FREE866 is offline   Reply With Quote
Old 05-21-2020, 10:16 PM   #6
Recycles dryer sheets
 
Join Date: Dec 2016
Posts: 343
Quote:
Originally Posted by N02L84ER View Post
Are you doing Roth conversions now?

I am not. I've chosen to keep the money invested and not pay tax now. I know thats a gamble as tax rates could be higher later.
FREE866 is offline   Reply With Quote
Old 05-21-2020, 10:28 PM   #7
Recycles dryer sheets
 
Join Date: Jul 2014
Location: Undisclosed
Posts: 292
The reason to do some Roth conversions now is to fill up the lower tax brackets and smooth out your taxes. For example, if your current marginal tax bracket is 12% but your expected tax bracket at age 70 is over 12%, then you should at least fill up the 12% bracket with Roth conversions.
I retired at age 52 and have been doing 20K to 33K of Roth conversions per year. When I started, I estimated my RMD would start at 40K+ when I am 70 which would make quite a bit of my SS taxable. I plan to continue the conversions through age 70 and I calculate my RMD will only be around 15K when I am 70 thanks to moving all of my equity funds to the Roth first and a lot less of my SS will be taxable. YMMV.
N02L84ER is offline   Reply With Quote
Old 05-22-2020, 04:25 AM   #8
Thinks s/he gets paid by the post
DrRoy's Avatar
 
Join Date: Dec 2015
Location: Michigan
Posts: 3,127
Quote:
Originally Posted by N02L84ER View Post
The reason to do some Roth conversions now is to fill up the lower tax brackets and smooth out your taxes. For example, if your current marginal tax bracket is 12% but your expected tax bracket at age 70 is over 12%, then you should at least fill up the 12% bracket with Roth conversions.
I retired at age 52 and have been doing 20K to 33K of Roth conversions per year. When I started, I estimated my RMD would start at 40K+ when I am 70 which would make quite a bit of my SS taxable. I plan to continue the conversions through age 70 and I calculate my RMD will only be around 15K when I am 70 thanks to moving all of my equity funds to the Roth first and a lot less of my SS will be taxable. YMMV.
+1 I'm similar.
__________________
"The mountains are calling, and I must go." John Muir
DrRoy is offline   Reply With Quote
Old 05-22-2020, 04:49 AM   #9
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jan 2018
Location: Tampa
Posts: 5,953
Another possible consideration is if you manage your MAGI for ACA purposes.
Our combined savings is 23k, which for us is a better deal than Roth conversions up until age 65 theoretically.
I am using TIRA funds to fund the portion of expenses which is used for MAGI.
__________________
TGIM
Dtail is online now   Reply With Quote
Old 05-22-2020, 06:03 AM   #10
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jun 2005
Posts: 10,103
Quote:
Originally Posted by N02L84ER View Post
Are you doing Roth conversions now?
Yep, Roth conversions now and in the future while paying expenses including taxes out of taxable accounts with their tax-free return of capital is generally what many folks do. That's what we do.

If we were eligible for ACA tax premium credits, then we would do something slightly different. Either way, we use tax-prep software to plan the amount of taxable income we need to dial in each year.
LOL! is offline   Reply With Quote
Old 05-22-2020, 06:38 AM   #11
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 25,717
Quote:
Originally Posted by FREE866 View Post
Looks like I would not qualify as these are the requirements:

  • Being diagnosed with COVID-19
  • Having a spouse or dependent diagnosed with COVID-19
  • Experiencing a layoff, furlough, reduction in hours, or inability to work due to COVID-19 or lack of childcare because of COVID-19
Yes, thought it might be likely that you didn't which is why I specified.... if you qualify... in post #2
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.

Retired Jan 2012 at age 56...target 65/35/0 AA TBD
pb4uski is offline   Reply With Quote
Old 05-22-2020, 06:45 AM   #12
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 25,717
Quote:
Originally Posted by FREE866 View Post
I am not. I've chosen to keep the money invested and not pay tax now. I know thats a gamble as tax rates could be higher later.
There is more to it than that... once you start SS or any pensions you may be in a higher tax bracket so Roth conversions can make sense even if tax brackets stay the same. Once we ERd our tax bracket was 0% (deductions exceed ordinary income and qualified income is at 0% rate) but once SS starts we will be in the 12% tax bracket.... so I have done Roth conversions for the last 6 years at about 8.5% (a blend of 0%, 10% and 12%)... saving 3.5% plus any future increase in tax rates.

If the tax rate stays the same then keeping the money invested in tax deferred is false savings. Say you have $100k of tax deferred and $20k of taxable, the tax rate is 20% and you earn 7% on your investments. If you convert the $100k to a Roth and pay the $20k in tax after 10 years you have $197k to spend (100*(1+7%)^10). If you don't convert, your $100k tax deferred grows to $197k and your $20k grows to $34k (20*(1+7%*(1-20%))^10) but you owe $39k in tax so you only end up with $192k in your Roth even if tax rates don't change at all.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.

Retired Jan 2012 at age 56...target 65/35/0 AA TBD
pb4uski is offline   Reply With Quote
Old 05-22-2020, 07:25 AM   #13
Recycles dryer sheets
 
Join Date: Dec 2016
Posts: 343
Thank you everyone for your thoughtful responses. So instead of doing it all at once you're suggesting I do a bit each year?
Can I just transfer out , say , 50K from the IRA into a Roth IRA?
OR do I need to sell in the IRA and then transfer the cash from proceeds into the Roth IRA?
FREE866 is offline   Reply With Quote
Old 05-22-2020, 07:31 AM   #14
Full time employment: Posting here.
 
Join Date: Nov 2010
Posts: 622
Like others, we are also using our free_from_tax space by converting to Roths, and have been doing so every year. We will be 100% Roth before applying for SS.

We still get to pay only minimal taxes, but also are ensuring that we won't have to pay income taxes in the future for our IRAs. Not being hamstrung by RMDs will greatly simplify our life after reaching 70 and give us options for estate planning. Look into it. Your future self could be very be glad you did.
devans0 is offline   Reply With Quote
Old 05-22-2020, 07:48 AM   #15
Thinks s/he gets paid by the post
RetireAge50's Avatar
 
Join Date: Aug 2013
Posts: 1,417
I am also 53. When our MFJ income gets to about 36k (from pensions and/or Roth conversions) the marginal taxes start to exceed about 27%. This is a combination of the 12% tax rate and another 15% phase out of ACA credits.

So we stop there and use cash from non-taxed sources.
RetireAge50 is online now   Reply With Quote
Old 05-22-2020, 10:13 AM   #16
Thinks s/he gets paid by the post
 
Join Date: Jul 2005
Posts: 4,107
Quote:
Originally Posted by FREE866 View Post
Thank you everyone for your thoughtful responses. So instead of doing it all at once you're suggesting I do a bit each year?
Can I just transfer out , say , 50K from the IRA into a Roth IRA?
OR do I need to sell in the IRA and then transfer the cash from proceeds into the Roth IRA?
I just transfer shares from one account to another to do Roth conversions at Fidelity. Very easy.

Get a Roth account started to get the 5 year waiting period out of the way.

Keep funding expenses, including the Roth conversion taxes, from your taxable accounts.

Keep an eye on 0% capital gains rate if you qualify. One of many possible reasons to limit Roth conversions. However at your age large Roth conversions are probably worth more than 0% capital gains.

Estimate your taxes with RMD's, SS, pensions, and any other income. Let that guide your decisions.
Animorph is offline   Reply With Quote
Old 05-22-2020, 11:56 AM   #17
Recycles dryer sheets
 
Join Date: Dec 2016
Posts: 343
Quote:
Originally Posted by Animorph View Post
I just transfer shares from one account to another to do Roth conversions at Fidelity. Very easy.

Get a Roth account started to get the 5 year waiting period out of the way.

Keep funding expenses, including the Roth conversion taxes, from your taxable accounts.

Keep an eye on 0% capital gains rate if you qualify. One of many possible reasons to limit Roth conversions. However at your age large Roth conversions are probably worth more than 0% capital gains.

Estimate your taxes with RMD's, SS, pensions, and any other income. Let that guide your decisions.

Thank you. My accounts are with Schwab so I just opened up a Roth IRA with them, yeah extremely easy. I have no pension so my only income at 70 would be RMD's ( think now they moved age to 72) as well as SS, and dividends from the taxable account.


Can you elaborate on what you mean by:
"Keep an eye on 0% capital gains rate if you qualify. One of many possible reasons to limit Roth conversions. However at your age large Roth conversions are probably worth more than 0% capital gains."
FREE866 is offline   Reply With Quote
Old 05-22-2020, 12:11 PM   #18
Full time employment: Posting here.
nvestysly's Avatar
 
Join Date: Feb 2007
Posts: 542
Quote:
Originally Posted by FREE866 View Post
I'm 53 now. I currently take money from my taxable brokerage account every year to pay my expenses. I also have an IRA. My plan is to take SS at age 70.

My question is ---would it make sense for the years between the age 59 and 1/2 until 70 to take money out of the IRA to pay expenses as opposed to taking money from the taxable account? The reason I ask is that if I continue to take money , throughout my 60's, from the taxable when I hit 70 my tax rate will shoot up dramatically with the RMD requirement for the IRA and SS.

Thanks
I may be repeating a few replies but here are some things to consider...

I used the 72(t) rule of SEPP to withdraw money from my IRA's prior to 59-1/2. My logic was to reduce the money in the IRA's during that time, and to continue withdrawing some money from the IRA's now that I am older than 59-1/2 so I can minimize the RMD impact when I turn 72 (formerly 70-1/2).

If RMD withdrawals at 72 are larger than I need I will distribute money to charities using the Qualified Charitable Distribution methodology in order to minimize taxes.

If there is money in my accounts to be passed on to heirs or charity upon my death it seems to be easier to transfer taxed money than tax deferred money. That's just my opinion and your situation may be different.

I am not using Roth IRA conversions. DW and I currently live on 1/3 of our money from taxable gains, 1/3 from dividends and 1/3 from IRA distributions. We got lucky, this was not planned, but we pay little to zero federal income tax with that mix of money combined with our deductions, exemptions and credits. Roth conversions will clearly put us into a mode of paying federal taxes. I'd rather give the money away now via a donor advised fund or later in life via QCD instead of paying taxes now. YMMV.
__________________
Dreamin' of Streamin'
FIRE'd at 52 on 7/8/11
nvestysly is online now   Reply With Quote
Old 05-22-2020, 12:23 PM   #19
Recycles dryer sheets
 
Join Date: Dec 2016
Posts: 343
Quote:
Originally Posted by nvestysly View Post

If RMD withdrawals at 72 are larger than I need I will distribute money to charities using the Qualified Charitable Distribution methodology in order to minimize taxes.

I'd rather give the money away now via a donor advised fund or later in life via QCD instead of paying taxes now. YMMV.



Yeah, my hesitation for doing a Roth is the sudden tax bill I'll be faced with, but maybe that is justified by having to pay zero taxes on any withdrawals in the future. Mentally I have to process that.
FREE866 is offline   Reply With Quote
Old 05-22-2020, 12:40 PM   #20
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 25,717
What tax bracket are you currently in if you do no Roth conversions? What tax bracket do you expect to be in once you are collecting SS and any pensions?
__________________

__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.

Retired Jan 2012 at age 56...target 65/35/0 AA TBD
pb4uski is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 2 (0 members and 2 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Online Savings Account vs Brokerage Account with Bond Funds mountainsoft FIRE and Money 10 05-17-2020 10:31 AM
Best time to draw and rollover funds klucich FIRE and Money 10 09-03-2019 07:36 AM
odd tax question about paying back draw to employer workburnout FIRE and Money 16 04-23-2019 04:29 PM
which accounts to draw on first? geem FIRE and Money 7 05-03-2017 03:36 PM
Is this a good reason not to draw from taxable account first? ItDontMeanAThing FIRE and Money 7 10-04-2015 11:04 AM

» Quick Links

 
All times are GMT -6. The time now is 08:45 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2020, vBulletin Solutions, Inc.
×