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Roth vs. Trad. IRA - Which to withdraw from first.
10-09-2010, 06:02 PM
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#1
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Recycles dryer sheets
Join Date: Jun 2010
Posts: 370
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Roth vs. Trad. IRA - Which to withdraw from first.
Please forgive my ignorance, but I've been wondering about this for a while...
At 59.5 years old I'll have approximately $60,000 in a traditional IRA; and $30,000 in a Roth. My retirement income at that age, without tapping into the IRA's, will be $27,000 annually. If I need/want to withdraw funds from the IRA accounts, is there a rule of thumb or best practice as to which I should withdraw from first due to the Trad. being taxable, while the Roth is not? i.e. Will I be further ahead depleting the funds from the Roth first before tapping into the traditional? Or is there a scenario where perhaps withdrawing a portiion from both makes sense?
Thank you for your time.
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10-09-2010, 06:25 PM
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#2
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Thinks s/he gets paid by the post
Join Date: May 2007
Posts: 1,577
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Try the ORP calculator, it will give you a withdrawal report for each year showing how much to take from IRA vs Roth.
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10-09-2010, 06:47 PM
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#3
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Moderator Emeritus
Join Date: Dec 2002
Location: Oahu
Posts: 26,856
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Quote:
Originally Posted by homestead
Try the ORP calculator, it will give you a withdrawal report for each year showing how much to take from IRA vs Roth.
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And when you use the calculator make sure it's been given your Social Security estimates, because I'm pretty sure you'll want to use up the traditional IRA before you start drawing SS.
__________________
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Co-author (with my daughter) of “Raising Your Money-Savvy Family For Next Generation Financial Independence.”
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10-09-2010, 06:50 PM
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#4
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Join Date: Jul 2007
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10-09-2010, 07:06 PM
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#5
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Recycles dryer sheets
Join Date: Jun 2010
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Thanks. I will try the calculator.
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10-09-2010, 07:07 PM
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#6
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Moderator Emeritus
Join Date: Feb 2006
Location: San Francisco
Posts: 8,827
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Generally Roths are withdrawn last to allow tax-free growth for as long as possible. There are exceptions related to current versus future anticipated tax brackets but it's hard to go wrong hanging on to Roths as long as you can.
At least that's my take.
__________________
Rich
San Francisco Area
ESR'd March 2010. FIRE'd January 2011.
As if you didn't know..If the above message contains medical content, it's NOT intended as advice, and may not be accurate, applicable or sufficient. Don't rely on it for any purpose. Consult your own doctor for all medical advice.
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10-09-2010, 07:24 PM
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#7
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jun 2005
Posts: 10,252
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10-09-2010, 08:28 PM
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#8
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Apr 2003
Location: Hooverville
Posts: 22,983
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Quote:
Originally Posted by Rich_in_Tampa
Generally Roths are withdrawn last to allow tax-free growth for as long as possible. There are exceptions related to current versus future anticipated tax brackets but it's hard to go wrong hanging on to Roths as long as you can.
At least that's my take.
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I agree with Rich. You don't need ORP, or anything else, to kow that Roth money is privileged money. There is no other tax free money with such freedom of investments that you can choose.
Guard it well.
Ha
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"As a general rule, the more dangerous or inappropriate a conversation, the more interesting it is."-Scott Adams
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10-09-2010, 09:13 PM
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#9
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Thinks s/he gets paid by the post
Join Date: Mar 2010
Location: Kerrville,Tx
Posts: 3,361
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Quote:
Originally Posted by Rich_in_Tampa
Generally Roths are withdrawn last to allow tax-free growth for as long as possible. There are exceptions related to current versus future anticipated tax brackets but it's hard to go wrong hanging on to Roths as long as you can.
At least that's my take.
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And also the question of do you want to leave an estate. If you want to donate your 401k/IRA to charity, its better to leave it that way, because the charity never pays taxes on the balance. The roth is better if you want to leave the 401k to someone else. Note that IMHO the 401k/IRA is the best vehicle to leave something to charity since you escape both the estate tax (if in that bracket) as well as the tax on income in respect of decedent.
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10-09-2010, 10:33 PM
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#10
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Apr 2003
Location: Hooverville
Posts: 22,983
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Quote:
Originally Posted by meierlde
And also the question of do you want to leave an estate. If you want to donate your 401k/IRA to charity, its better to leave it that way, because the charity never pays taxes on the balance. The roth is better if you want to leave the 401k to someone else. Note that IMHO the 401k/IRA is the best vehicle to leave something to charity since you escape both the estate tax (if in that bracket) as well as the tax on income in respect of decedent.
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Quote:
Originally Posted by LauAnn
Please forgive my ignorance, but I've been wondering about this for a while...
At 59.5 years old I'll have approximately $60,000 in a traditional IRA; and $30,000 in a Roth. My retirement income at that age, without tapping into the IRA's, will be $27,000 annually. If I need/want to withdraw funds from the IRA accounts, is there a rule of thumb or best practice as to which I should withdraw from first due to the Trad. being taxable, while the Roth is not? i.e. Will I be further ahead depleting the funds from the Roth first before tapping into the traditional? Or is there a scenario where perhaps withdrawing a portiion from both makes sense?
Thank you for your time.
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No doubt about it, charitable bequests and gifts are going to be a big factor here...
__________________
"As a general rule, the more dangerous or inappropriate a conversation, the more interesting it is."-Scott Adams
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10-09-2010, 11:43 PM
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#11
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Moderator Emeritus
Join Date: Dec 2002
Location: Oahu
Posts: 26,856
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Quote:
Originally Posted by meierlde
And also the question of do you want to leave an estate. If you want to donate your 401k/IRA to charity, its better to leave it that way, because the charity never pays taxes on the balance. The roth is better if you want to leave the 401k to someone else. Note that IMHO the 401k/IRA is the best vehicle to leave something to charity since you escape both the estate tax (if in that bracket) as well as the tax on income in respect of decedent.
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From the info we've been given by the OP, I doubt estate tax will rear its ugly head.
__________________
*
Co-author (with my daughter) of “Raising Your Money-Savvy Family For Next Generation Financial Independence.”
Author of the book written on E-R.org: "The Military Guide to Financial Independence and Retirement."
I don't spend much time here— please send a PM.
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10-10-2010, 07:50 AM
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#12
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Thinks s/he gets paid by the post
Join Date: Jul 2005
Posts: 4,366
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My results come out best if I take traditional IRA/401k withdrawals that fill the lower tax bracket and then enough Roth withdrawals to meet my income needs. I imagine this is highly dependent on how close your income is to specific tax brackets and what other income you have. But it is a case where withdrawals from both makes sense. Otherwise, Roth comes out last.
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10-10-2010, 08:11 AM
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#13
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Recycles dryer sheets
Join Date: Nov 2003
Location: Charlotte
Posts: 360
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Quote:
Originally Posted by Animorph
My results come out best if I take traditional IRA/401k withdrawals that fill the lower tax bracket and then enough Roth withdrawals to meet my income needs. I imagine this is highly dependent on how close your income is to specific tax brackets and what other income you have. But it is a case where withdrawals from both makes sense. Otherwise, Roth comes out last.
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I think this is the situation/approach that the ORP calculator uses.
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10-10-2010, 02:12 PM
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#14
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Recycles dryer sheets
Join Date: Sep 2009
Posts: 353
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Tax brackets for your traditional IRA (TIRA) withdrawals are the key. If you have the same tax bracket now and later for your TIRA withdrawals, it does not matter whether you get your money from TIRA or Roth. The goal is to minimize the tax bracket at which you withdraw your TIRA money... So, I imagine Animorph's approach is often the best (unless you can also project into the future what your tax bracket will be).
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10-10-2010, 02:23 PM
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#15
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Thinks s/he gets paid by the post
Join Date: Jun 2004
Location: W Wash
Posts: 1,644
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Fido has a good discussion on their open web page https://news.fidelity.com/news/artic...es&topic=taxes that addresses using Roth funds to help avoid having SS income taxed at higher rates and for higher income folks avoiding the Medicare Surtax.
While the trade-offs may not be something a lot of folks will have to deal with, it is really amazing how complex enjoying your "stash" is getting to be.
Nwsteve
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10-10-2010, 02:35 PM
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#16
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Thinks s/he gets paid by the post
Join Date: Jul 2006
Posts: 1,901
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As others have pointed out, its all about taxes. A Roth comes in handy keeping taxes low in those years when you may have a large expense like a new car or home repairs. You can also use the Roth funds to reduce how much of your SS is subject to tax. You will have to run a tax simulator to check various scenarios. Good luck!
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“I guess I should warn you, if I turn out to be particularly clear, you've probably misunderstood what I've said” Alan Greenspan
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10-10-2010, 07:51 PM
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#17
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Recycles dryer sheets
Join Date: Jun 2010
Posts: 370
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Thanks all. I appreciate the information.
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