What to leave behind: Choosing Assets

[Moparguy392]

An author wrote: "While you're alive you should spend your after-tax dollars first, and then you IRA dollars and then your Roth dollars. That way you are maximizing your own money, because you're getting the most out of your tax-sheltered accounts"

Seems obvious but are there any other thoughts regarding this? I know it is situational and dependent upon individual circumstances.

 

[Kings over Queens]

Deep thoughts for Wednesday.

I hadn't really consider it.

My plan, subject to change, is to spend my portfolio money first, then get to RMD's and SS.

In theory I'd like to do whatever I can to minimize the amount of tax collected by the government, even if that means taking distributions or doing roth conversions when i don't need them thus generating say a dollar in tax, rather than having the investment grow and now there is a bigger bucket of tax money for them to get either through rmd's or inheritance.

I'm not sure I answered your question.

 

[RunningBum]

Individual circumstances can definitely change this. I want to get the most out of all of my accounts, not just the tax-sheltered ones.


Knowing that I'm likely to leave a lot behind when I die, I'd rather not pay taxes on holdings with high capital gains, since they get stepped up basis for my heirs. I'll have my IRA converted to Roth at low rates, except what I might want to use for charitable giving. Then it makes more sense to me to spend down the Roth, since taxes have already been paid, than to sell from taxable and pay cap gains.


My situation may be different from many, but I don't think it's unique.

 

[qwerty3656]

It seems the big driver is managing your income level for all the various taxes, RMDs, ACH insurance, etc.

 

[Montecfo]

The most "standard" advice is to use Roth funds last, but RB above makes the valid case for not liquidating long held equity positions.

Only further comment is if you can liquidate them at 0% then you probably should.

 

[OldShooter]

No simple answer. Bequests that will go to charities should be left in tIRAs as they will never be taxed. Similarly, funds that can be given via QCDs should be.

Funds left to individuals inside tIRAs must be liquidated within ten years (current law). That creates a tax rate arbitrage decision. Will your tax rate on taking the tIRA money be lower than the beneficiary's tax rate when he/she takes the money?

One of our bequests will fund a special needs trust for a grandchild. That money will be spent over more than ten years, so forced liquidation of a tIRA will result in significant money being taxed at the high trust rate. So that one gets Roth money.

No simple answers even making the probably invalid assumption that the laws will not change.

 

[Sunset]

While I'll leave the Roth alone unless need large amounts of cash, for example a down payment on a 2nd Chateau.

I'll spend interest, dividends from regular accounts and IRA until RMDs and then do the same afterwards. My spending from IRA's will include conversions if not actually spent prior to RMD's.

 

[RunningBum]

Only further comment is if you can liquidate them at 0% then you probably should.

Yes, definitely. Once my tIRA is converted as much as I want it to be, I will take 0% cap gains as much as I can. Once I start SS I won't be able to.

 

[audreyh1]

If you are married in a community property state, you get a stepped up basis for your assets as well as your deceased spouse’s in jointly held accounts, so take advantage if you can.

 

[athena53]

One point I read recently is that spreading out IRA withdrawals over a longer period (i.e., BEFORE RMDs) might lower your taxes in the long run. It depends on how the tax rates change, of course, but it makes sense that taking withdrawals over a longer period of time in smaller chunks might keep you from being jolted into higher brackets (with associated stealth taxes) when you do start. It also means that DS, my only heir, isn't going to be stuck with (likely) over $1 million that he'll have to withdraw over 10 years and pay the associated taxes.

I was able to do a Roth conversion last year and will be looking at that in subsequent years as well as starting QCDs in August when I turn 70 1/2.

 

[Bruno]

Do you have RMD on the ROTH IRA? What about if you die? is that also an inherited Roth IRA?

EDITED...Guess that is a dumb one ..no taxes to collect on Roth.

 

[njhowie]

An author wrote: "While you're alive you should spend your after-tax dollars first, and then you IRA dollars and then your Roth dollars. That way you are maximizing your own money, because you're getting the most out of your tax-sheltered accounts"

Seems obvious but are there any other thoughts regarding this? I know it is situational and dependent upon individual circumstances.

Seems a little counterintuitive...if you are spending the Roth last, then you'll likely pass before spending it all the way down, therefore you did not get the most out of your tax sheltered accounts. If you spend the IRA (I'm assuming traditional taxable tax-deferred distributions) and then the Roth, you will pay taxes on the the IRA withdrawals. Again, not maximizing the tax-sheltered nature of the assets you have - you are not getting that benefit.

 

[fh2000]

If you are married in a community property state, you get a stepped up basis for your assets as well as your deceased spouse’s in jointly held accounts, so take advantage if you can.

California is such a state. I have few stocks that I acquired decades ago, and I have lost the records of their cost base. Brokerage firms only track cost bases few years back. For those stocks, I will either sell with cost base $0, or simply leave behind for DW or our heir so they can start tracking with new cost base.

 

[Montecfo]

California is such a state. I have few stocks that I acquired decades ago, and I have lost the records of their cost base. Brokerage firms only track cost bases few years back. For those stocks, I will either sell with cost base $0, or simply leave behind for DW or our heir so they can start tracking with new cost base.

You can probably come up with a better estimate than zero.

Historical pricing data is out there.

 

[SecondCor521]

Yes, it's highly situational.

See the Kitces article mentioned towards the bottom of this post:

https://www.early-retirement.org/fo...h-withdrawal-strategy-117271.html#post2904571

 

[donheff]

I am not worried for myself but I do worry about the kids/grandkids. I think in terms of the best net value over a couple of generations. Thus Roth conversions are not so I can have tax free splurges in the future but so the kids can pickup tax free inheritances that can continue to grow for ten years. Extra RMD leftovers will go into taxable equities that will get stepped up to market value when inherited. The IRAs will generate a substantial tax hit whenever they get distributed.

 

[harley]

Seems a little counterintuitive...if you are spending the Roth last, then you'll likely pass before spending it all the way down, therefore you did not get the most out of your tax sheltered accounts. If you spend the IRA (I'm assuming traditional taxable tax-deferred distributions) and then the Roth, you will pay taxes on the the IRA withdrawals. Again, not maximizing the tax-sheltered nature of the assets you have - you are not getting that benefit.

This depends on the intent of the investor. If you're managing taxes for yourself only, I can see that this could be a good choice. In our case we intend to leave assets to an heir, so leaving the Roth for last helps them. If you leave the tIRA to an heir, they could be hit with significant taxes due to the 10 year RMDs for inherited IRAs. So if the intent is to minimize total taxes on your assets, spending down or leaving the Roth for the next generation would make more sense.

 

[braumeister]

No heirs here, so I only care about things that impact me directly, such as tax brackets, IRMAA surcharges, etc. Even though I'm still planning to take it all with me, anything left behind will go to charities and they don't pay taxes.

 

[Rianne]

Our tIRA is not state taxed and neither is SS. That could change. As we begin to WD, I think of our portfolio as buckets and will take some from each bucket as we need it and whatever is tax efficient. I'd like to stay ~ 30-40% in index funds. Our index funds have provided a 7.5% IRR over 10 years. The tIRA is laddered CDs and treasuries.

 

[njhowie]

This depends on the intent of the investor. If you're managing taxes for yourself only, I can see that this could be a good choice. In our case we intend to leave assets to an heir, so leaving the Roth for last helps them. If you leave the tIRA to an heir, they could be hit with significant taxes due to the 10 year RMDs for inherited IRAs. So if the intent is to minimize total taxes on your assets, spending down or leaving the Roth for the next generation would make more sense.

Sure, but YOU don't get the benefit of the tax free nature of it, your heirs do. The initial post put forth the spending order to maximize your benefits of those assets.

When you began contributing to the Roth, was it your intent to leave it tax free for your heirs? Maybe. But, I don't believe that's the intent of most folks - they contribute to a Roth so they will reap the benefits in the future when they withdraw.

 

[NW-Bound]

"What to leave behind: Choosing Assets"

I thought that when I croak, I will have to leave everything behind.

About what to spend first, I think I will try to draw down my 401k/IRA.

 

[Telly]

If you are married in a community property state, you get a stepped up basis for your assets as well as your deceased spouse’s in jointly held accounts, so take advantage if you can.

I did not know that! Thanks!
I'll need to tell DW about that.

 

[rkser]

No simple answer. Bequests that will go to charities should be left in tIRAs as they will never be taxed. Similarly, funds that can be given via QCDs should be.

Funds left to individuals inside tIRAs must be liquidated within ten years (current law). That creates a tax rate arbitrage decision. Will your tax rate on taking the tIRA money be lower than the beneficiary's tax rate when he/she takes the money?

One of our bequests will fund a special needs trust for a grandchild. That money will be spent over more than ten years, so forced liquidation of a tIRA will result in significant money being taxed at the high trust rate. So that one gets Roth money.

No simple answers even making the probably invalid assumption that the laws will not change.

Old Shooter,
Our dear grand daughter is also special needs, I want to learn from you & others about how we can leave some money for her.
Have you established a separate Trust for your grandchild ?
Thankyou in advance.

 

[OldShooter]

Old Shooter,
Our dear grand daughter is also special needs, I want to learn from you & others about how we can leave some money for her.
Have you established a separate Trust for your grandchild ?
Thank you in advance.

Basically the idea of a special needs trust is to provide for the beneficiary in a way that does not disqualify him/her from receiving all of the current and future government benefits to which they are entitled. A few internet searches should provide you with a little more detail; I am not in any way an expert. There are also nonprofit organizations that specialize in administering such trusts.

More so even that with normal estate planning, you should consult an experienced specialist attorney in order to make a plan that achieves your objectives.

 

[Moparguy392]

"What to leave behind: Choosing Assets"

I thought that when I croak, I will have to leave everything behind.

About what to spend first, I think I will try to draw down my 401k/IRA.

I told my wife I'm leaving her the checkbook but I'm taking my saving bond with me!