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taxable or tax deferred
Old 07-17-2011, 10:46 AM   #1
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taxable or tax deferred

My diversified portfolio is currently worth 360,000. 260,000 tax deferred and a recently created 100,000 taxable at Vanguard. I am retired and have been withdrawing 5% to supplement my pension. I'm in the 15% tax bracket. With the new account my withdrawal rate will be reduced to 3.7%. Does it make sense to now get my distributions from taxable account only until it expires and let tax deferred account continue to grow? I figure even if taxable account does not grow I can go a minimum of 7.5 years before it is exhausted. What if I need a large chunk of money down the road? Does it make sense to do 50/50. I do have cash reserves to last 3 years to make up for these withdrawals but I consider this to be emergency money and a possible wedding for my daughter in the future. Any ideas or comments from the distinguished community would be appreciated.
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Old 07-17-2011, 03:37 PM   #2
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I would recommend you maximize the 15% taxable withdrawals from your tax deferred account. If you take out more than you spend, put it in an after tax account. Let your tax deferred account grow as much as possible and minimize withdrawals.
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Old 07-17-2011, 04:51 PM   #3
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I'm not quite sure I understand, 2B, are you saying max out my withdrawal to the end of the 15% tax bracket in the tax deferred account. If I do that I would be withdrawing 24,000 and I am currently only withdrawing about 13,000. Then put the 11,000 in the taxable account. My tax deferred account would be taking a big hit and lose growth potential. Maybe I am not understanding correctly. Thank you for your reply.
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Old 07-17-2011, 05:05 PM   #4
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I think you may have to consider your age and possible future RMD, as well as current tax rates.
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Old 07-17-2011, 05:08 PM   #5
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Since return of capital is tax-free, if you live off of taxable, you can convert a bit of tax-deferred each year to a Roth IRA. You may end up paying virtually no taxes on the conversions, but you will have to put on your thinkin' noggin' and perhaps use tax software to figure out how much to convert each year without paying too much in taxes.

Once again: CONVERSION to Roth!
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Old 07-17-2011, 05:30 PM   #6
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Your age may play a factor in some of this discussion.

I agree with LOL that a Roth might be a good option especially in your tax bracket.

Otherwise, generally it is better (tax wise) to use your investments you obtained with after-tax dollars vs pre-tax investments (retirement accounts). The longer the investment can grow tax free the bigger the pot gets. You will pay ordinary income taxes on it when you take it out but not capital gains etc. Your after-tax investments get taxed on current gains and dividends and interest; you have already paid the taxes on previous gains etc. so there is nothing to be gained by waiting to liquidate these accounts rather than a pre-tax account that has not been taxed for gains etc.
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Old 07-17-2011, 08:33 PM   #7
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Roth conversion if you can, though watch out for 5-year rules and the like. No tax problem taking out more than expected from a Roth for a wedding. If that's not possible for you, I might use mostly taxable funds, but leave some available for emergencies. You need to project whether your RMD's or future expenses from the tax-deferred account might eventually exceed the 15% tax bracket. If that is a possibility, taking out more now may be more tax efficient, even if you just put the excess into the taxable account.
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Old 07-24-2011, 06:39 AM   #8
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Defiantly Roth Conversion.

Live off taxable account and then convert an amount from tax deferred account to a Roth IRA such that amount converted + capital gains from taxable account + income from other sources max the 15% tax bracket.
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Old 07-24-2011, 06:54 AM   #9
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Ditto on the Roth IRA suggestion.

But you need to research it and create a plan. Make sure you understand the tax implications.
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Old 07-24-2011, 07:10 AM   #10
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Well, even though he's in the 15% bracket, much of his income pay be in the 0% bracket particularly for cap gains and qualified dividends. So his effective/average total rate could be way under 15%, maybe 5%. Thus if he maximizes the 15% bracket, then everything above what he uses today is taxed at 15% - higher than his effective rate. Could be costing him 5-10% in taxes.
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Old 07-24-2011, 09:00 PM   #11
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Thanks all for the input. I think I'm leaning toward a combination. I do have an inherited IRA so I'll start there with the RMD's. Then interest from money market and cash and probably split the difference with taxable and tax deferred. My heirs will receive the stepped up basis in the taxable. They probably be in a lower tax bracket when they inherit the tax deferred. Of course everything is subject to revision.
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