Spending down IRA in retirement

[RunningBum]

Think any of them also decide to delay SS til age 70 expecting to live forever and rake in lots of money? I'm one of those paying taxes early, but then my perspective goes beyond my lifetime and I hope to give my heirs the possibility of less taxes as well.

If you live past the SS break even point you will leave you heirs more by delaying the start of SS.

 

[2017ish]

Originally Posted by sengsational
The recommendations of the tool often have the retiree paying more taxes early in order to reduce taxes later. That doesn't sit well with some people because there's no guarantee that the retiree will live-out the entire plan (ie they'll never hit break-even paying taxes early vs late).

Think any of them also decide to delay SS til age 70 expecting to live forever and rake in lots of money? I'm one of those paying taxes early, but then my perspective goes beyond my lifetime and I hope to give my heirs the possibility of less taxes as well.

Well, we aren't there yet, but that's what we plan. Roth conversions up front, probably to top of 25% bracket, delay whatever social we might end up with to 70 at least for highest earner (probably for both of us though). The longevity insurance is compelling given DW's individual life expectancy. My planning takes her to 105, based on family history, education/health level, etc.

 

[foxfirev5]

If you live past the SS break even point you will leave you heirs more by delaying the start of SS.

There's more than one assumption in play with this scenario. First, I get a kick out of how people believe that future changes in SS benefits, taxes and investment returns will be treated fairly and based on history. It's all speculative and we have to make our own decisions. Personally I'll take what I can get from SS ASAP and live with my investment decisions. Just like I've done for the last 35+ years. Thanks

 

[nun]

If you live past the SS break even point you will leave you heirs more by delaying the start of SS.

Yes but it should be no surprise that the break even point is close to the average mortality age. Given the 50/50 chance of hitting the break even point and as I'm not worried about running out of money, I'm going to take SS as early as I can.

 

[RunningBum]

There's more than one assumption in play with this scenario. First, I get a kick out of how people believe that future changes in SS benefits, taxes and investment returns will be treated fairly and based on history. It's all speculative and we have to make our own decisions. Personally I'll take what I can get from SS ASAP and live with my investment decisions. Just like I've done for the last 35+ years. Thanks

That's definitely the wild card in the equation. I don't know how to evaluate the possibilities of that.

 

[Hermit]

The strategy for those who retire early is to delay SS until 70 using roth conversions in the intervening years. I am not trying to optimize this strategy to the nth degree, but instead am only converting up to the 15% tax bracket, which I know is lower than if I didn't convert when delaying SS. I am also in the fairly unique position of having $2 of every $3 in taxable, so am drawing down taxable until 70 to keep conversion taxes low. Another reason I am converting to Roth is to minimize possible negative consequences of future tax reform (Roths are tax-free).

I think Medicare used to be "tax free". Not any more. It has "fees" for higher income recipients. The higher your income the more you pay. My motto is to "never say never" when it comes to all government programs.

 

[gerntz]

No interest in spending down IRA. Just want to live life as I want & if that includes IRA spend down, OK. I mean, who cares if I spend it down?

 

[RunningBum]

No interest in spending down IRA. Just want to live life as I want & if that includes IRA spend down, OK. I mean, who cares if I spend it down?

Did someone ask you? I don't think anyone cares if you spend your IRA down. Do you have a problem if someone else does? Why?

Most of us are here to learn. I don't really care what anyone else does, but I want to know why they do what they do, to see if I can do anything better in my own situation. I'll also put out my own opinion on what to do, to see what holes people shoot into it. Also, entertainment.

Not really sure what the point of your post is?

 

[Options]

There's more than one assumption in play with this scenario. First, I get a kick out of how people believe that future changes in SS benefits, taxes and investment returns will be treated fairly and based on history. It's all speculative and we have to make our own decisions. Personally I'll take what I can get from SS ASAP and live with my investment decisions. Just like I've done for the last 35+ years. Thanks

Emphasis added

Good point. I am personally viewing delayed SS as longevity insurance acting like [-]an annuity[/-] the best annuity deal you can get, based on my personal odds of living longer. I am not considering any break even analysis in this consideration. It is strictly an "insurance" consideration based on my risk tolerance in the area of longevity. Nothing is certain. We do the best we can with what we've got at the moment. Flexibility is crucial.

I think Medicare used to be "tax free". Not any more. It has "fees" for higher income recipients. The higher your income the more you pay. My motto is to "never say never" when it comes to all government programs.

Absolutely. And there's more where that came from. This is why I added (probably way too much) padding to my PF to mitigate possible negative future outcomes by way of upcoming tax/SS/medicare reform.

No interest in spending down IRA. Just want to live life as I want & if that includes IRA spend down, OK. I mean, who cares if I spend it down?

Well, you might care if you leave money on the table (by paying more taxes than needed) if you failed to analyze your own personal situation sufficiently. It's amazing how different (as in lower) taxes can be in retirement when effective tax bracket management strategies are employed. For the duration of my PF life, I will only pay about $600 annually in taxes, and that's only because I'm doing roth conversions. The conversions will considerably reduce taxes after delayed SS and RMD's start at 70 1/2.

 

[Hermit]

.... Well, you might care if you leave money on the table (by paying more taxes than needed) if you failed to analyze your own personal situation sufficiently. It's amazing how different (as in lower) taxes can be in retirement when effective tax bracket management strategies are employed. For the duration of my PF life, I will only pay about $600 annually in taxes, and that's only because I'm doing roth conversions. The conversions will considerably reduce taxes after delayed SS and RMD's start at 70 1/2.

That's awesome! I can't get below the 25% tax bracket. I have a nice pension that kicks my SS into the 75% taxable bracket which increases my taxable income even more! (It isn't pretty being "rich" in the eyes of the tax man!) When I reach 70 1/2, tax things really get ugly - above $10k to multiples of that each year depending on how much I give to charity (QCDs). Rule #1 to stay out of this situation is to not allow your spouse to die!

 

[gauss]

Well, we aren't there yet, but that's what we plan. Roth conversions up front, probably to top of 25% bracket, delay whatever social we might end up with to 70 at least for highest earner (probably for both of us though). The longevity insurance is compelling given DW's individual life expectancy. My planning takes her to 105, based on family history, education/health level, etc.

+1 Very similar thinking to my approach. I have always been influenced by Delayed Gratification (ie I probably would not have "eaten the marshmallow").

-gauss

 

[gauss]

That's awesome! I can't get below the 25% tax bracket. I have a nice pension that kicks my SS into the 75% taxable bracket which increases my taxable income even more! (It isn't pretty being "rich" in the eyes of the tax man!) When I reach 70 1/2, tax things really get ugly - above $10k to multiples of that each year depending on how much I give to charity (QCDs). Rule #1 to stay out of this situation is to not allow your spouse to die!

+1 Another very sobering reason why I am Roth converting every year now for the next 20 years while we are able file taxes as Married Filing Jointly (MFJ).

 

[LOL!]

For any young readers: I wish we had put more into ROTH's instead of simply filling up the IRA/401K's , more of a mixture would have been better overall for us.

Roths were not invented in time for us to use them much and many people could not contribute to them because of income limits. Furthermore, conversions were off limits unless income was low.

I am glad Roths weren't around to confuse the situation of saving for retirement because we might have put too much money in them instead of taking the tax breaks for just using regular 401(k)s and 403(b)s.

As it is, our tax bracket dropped from 33% or so to 15% and lots of income is tax free now. Our effective rate (average taxes) on our AGI is about 3%. There are lots of folks who don't pay any income taxes at all.

We can do Roth conversions now while we are in this low bracket, so that's what we do. We can pay the taxes for conversions from our taxable account which is the best way to do it.

As for the tax torpedo, I have projections and just don't see it happening for us.

 

[audreyh1]

Our IRAs are less than 10% of our liquid assets, and we get above the 15% tax bracket for total income meaning some of our dividends/cap gains are tax-free but not all of them.

We're just going to bite the tax torpedo. We'll put it off until 70 and get hit by RMDs and SS taxes at the same time. Our tax bracket will probably increase, but we would pay AMT on any extra ordinary income now, so it just doesn't matter.

 

[gerntz]

Did someone ask you? I don't think anyone cares if you spend your IRA down. Do you have a problem if someone else does? Why?

Most of us are here to learn. I don't really care what anyone else does, but I want to know why they do what they do, to see if I can do anything better in my own situation. I'll also put out my own opinion on what to do, to see what holes people shoot into it. Also, entertainment.

Not really sure what the point of your post is?

The title of this thread is "Spending down IRA in retirement". I gave my opinion on that. What's the problem?

 

[RobbieB]

One is supposed to spend down the IRA in retirement and the government insists that you do so.

For those with no pension (like me) you get to buy yourself one. I got a nice one that will pay more than SS does and it's still growing strong.

I got the SS, I got the savings and investments and I got the IRA to buy myself a pension when the time comes.

I got the tripod -

 

[gerntz]

Well, you might care if you leave money on the table (by paying more taxes than needed) if you failed to analyze your own personal situation sufficiently. It's amazing how different (as in lower) taxes can be in retirement when effective tax bracket management strategies are employed. For the duration of my PF life, I will only pay about $600 annually in taxes, and that's only because I'm doing roth conversions. The conversions will considerably reduce taxes after delayed SS and RMD's start at 70 1/2.

I've spent a lot of time analyzing my finances to minimize tax rate percentages by keeping income just below the start of higher rate brackets. Whether I did that optimally is another matter.

But now I'm at the point where shortly SS & RMD's both will kick in & I won't be able to impact income nor taxes much that I can see besides using tax-free investments. Neither could my former CPA.

Some talk about "spending down" their IRAs. I don't understand how spending helps. Less income because of fewer assets?

 

[Hermit]

One is supposed to spend down the IRA in retirement and the government insists that you do so.

For those with no pension (like me) you get to buy yourself one. I got a nice one that will pay more than SS does and it's still growing strong.

I got the SS, I got the savings and investments and I got the IRA to buy myself a pension when the time comes.

I got the tripod -

Wow! All this time I was trying to figure out how to move the most money to taxable accounts and the least to the government. I think I am starting to understand your "spend and have fun" policy. I will have to start adding bells and whistles to that F350 and camper I have been thinking about!

 

[harley]

I've spent a lot of time analyzing my finances to minimize tax rate percentages by keeping income just below the start of higher rate brackets. Whether I did that optimally is another matter.

But now I'm at the point where shortly SS & RMD's both will kick in & I won't be able to impact income nor taxes much that I can see besides using tax-free investments. Neither could my former CPA.

Some talk about "spending down" their IRAs. I don't understand how spending helps. Less income because of fewer assets?

Per your explanation above, it's too late for you. But as this is an early retirement forum, many of us are young enough that spending down/Roth converting a t-IRA to the top of the (usually) 15% bracket will help minimize our RMDs later in life, helping minimize taxes. If you draw from your t-IRA from age 59.5 (or earlier with a 72(t)) you can be drawing money from the IRA at a lower tax rate then you put it in. And by drawing the balance of the IRA down, you will have lower RMDs eventually. If you're lucky, you'll lower them enough to impact taxes. That's the reason.

Another advantage of this strategy is that it allows you to let your after tax investments grow. You never have to spend them, so (if interested) you can pass them on to your heirs without having to deal with the major tax hit of an inherited IRA.

 

[RobbieB]

Roth conversions were my plan too but I made too much dough this year with dividends and capitol gains to do anything. It would have all been at 25%, so maybe next year.

 

[NW-Bound]

When I stopped working 4 years ago, our after-tax accounts were 1/2 of the before-tax accounts. After heavy expenses while not being able to tap the IRA/401k because we were not yet 59-1/2, the after-tax money is now down to less than 1/3 of the before-tax money. I don't like it!

IRA accounts are good for trading because I can do market timing without worrying about taxes. I make AA adjustments, option writing, and short-term trading all in there. It's great. So, the before-tax money grows, while I am more conservative with the after-tax money because of tax considerations, plus that is the money to be spent before the age of 60. So, that's why my after-tax money shrinks.

I have done as much Roth conversions as possible since my earned income stopped, but at this point it is still a measly 7.5% of investable assets. Roth money is a wonderful thing. It allows making big AA changes when the market condition calls for it with no concerns about taxes, and is like IRA in that aspect. Yet, it can be tapped for large expenses without worrying about taxes, unlike IRA withdrawals. It's just, well, wonderful.

I've got to get meself more Roth money.

 

[almost there]

Not sure if spending down an IRA or getting it out of the IRA are the same thing?
I also never understood why folks think you have to spend the money if you take SS at 62? If you want to take SS at 70, why not take it at 62 and bank it for 8 yrs. till 70? And have an extra $150-200k in the bank at 70? I plan to spend SS at 62, rather than money in my existing accounts. I am even thinking about doing a 72T now at 55. Have 500k in the IRA and might pull 24k a year out of it possibly forever. If I make 2% on it, it will take me to 90+ yrs old. Stay in a good tax rate, and bank the excess.
Just not able to warm up to paying the Tax's up front on Roth conversions. Its a mental block or something. LOL LOL. My roth, while not huge at 150k will probably be the last thing I use.......... If ever
But in my case as it turns out, the IRA or Roth do not play a major role in my retirement income. Everyone's case is different....... While my plan may not be perfect, its what I am going with. And seems to be working. Time will tell.

 

[Golden sunsets]

I have never bought into the idea that delaying SS is a 6-8% "return". At best, it grows based on COLA only. A return implies that the asset grows each year and at any point in time, the full amount, principal plus growth is available for you or your heirs to use. And while different than investment risks, there are also downside risks to SS amounts as well in the future (100% taxation for example) .

Delaying SS would be better characterized as a 6-8% increase in monthly payment amount, not growth of an asset. And when you consider smaller monthly payments over a longer time vs. larger monthly payment over a shorter time, then the cross over point is around 11-13 years. So, taking SS at age 70 means there is no financial gain til at least age 81. And the percentage gain compared to taking SS early will be very low even at life expectancy of around 85 yrs.

This is just my view, but I took SS early (since I have no control over changes in SS or yearly COLA) and maximized investment assets that I at least have some possibility of adapting to market changes.

Not following your logic that "at best your payment grows at the rate of cola only". My payment when I reach 70 will be 132% of my PIA at full retirement age plus the inflation rate between full retirement age and age 70. True if I die before the crossover date, I've left money on the table. Also true if I live beyond the crossover date, I'll make out better. There are many reasons why deciding when to take SS is a highly individual process, which is not a one solution fits all. In my case the lower earning spouse claimed at 62, the higher earning spouse claimed spousal at FRA and will claim on his/her own record at 70, providing some cheap longevity insurance.


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[bingybear]

Exactly. And tax-gain harvest in the process!

This year I will debate on Roth conversions to the top of the 15% bracket or just below the PTC cliff. However, I do not due tax gain harvesting since I believe in my case the roth conversion is more valuable than harvestinglosses. In fact I continuously work on harvesting capital losses and have banked about 100k... so little need for LTCG harvesting. Yes I realize that someday I will have to realize these.
To the OP, what is best really depends on your situation. I am about 55%/45% after tax/tax preferenced. I hold most of my equities in taxable accounts mostly in ETFs. I do not hold MF in taxable account since they can have large unexpected distributions (broad index funds may be an exception). Much of the equity distributions have tax advantages (Q-divy). I mostly put fixed income in T-IRA. fixed income mostly is taxes as normal income which is the same rate as tIRA withdraws. It also tends to grow slower than equities in general. I use my limited Roths for higher risk/return investments (not that I take extreme risks).
Dividing it up this way, the tIRA may not out grow the conversions in the long run. I am also considering if to take larger roth conversions.

One must also consider that the rules/laws may change. So all these plans may change with the flick of a pen in Washington. I'm not trying to anger the moderator gods, but one must stay somewhat flexible as tax laws and benefits can change almost as fast as our situations.

Maybe I'm a little different having more after tax $ than total IRA $ which may lead me to different thinking. Or maybe I just don't have a clue as the right thing to do.

Good luck

 

[larrytbm]

Not following your logic that "at best your payment grows at the rate of cola only". My payment when I reach 70 will be 132% of my PIA at full retirement age plus the inflation rate between full retirement age and age 70. True if I die before the crossover date, I've left money on the table. Also true if I live beyond the crossover date, I'll make out better.

The real point is that the increase in payment amount is not "extra or bonus money or asset growth", it is simply paying you later for money you could have taken earlier. Without that increase, crossover would never happen. As someone stated, the crossover point is very close to life expectancy so unless you die very early or live very long, then the +/- impact of either decision will be minimal.