Where to Pull Money from in 2024

[GATime]

I'm 63 and just retired 2 months ago. Yea me! For the remainder of 2023 we'll live off of our brokerage account funds. For 2024+, I wanted to stay in the 12% bracket (filing jointly) so I planned to pull from my IRA for our living expenses and make minimal use of the brokerage account to supplement as needed. I have no Roth account.

An alternative that was suggested by an advisor I was interviewing, was to pull all living expenses from the brokerage account and do Roth conversions to fill the 12% bracket.

If I pull all living expenses from the brokerage account, I have about 3 years of funds available before I would need funds from IRA/Roth. I do like having a good size brokerage for what if scenarios where large funds are needed. Perhaps I'll get a wild burr to buy an RV.

Any thoughts on the two directions.

 

[pb4uski]

To me, a Roth is equal to a brokerage account if funds are needed. In fact better since Roth withdrawals are tax-free but brokerage funds withdrawals might not be tax-free.

I think it makes sense to use the brokerage funds for living, maximize Roth conversions and have the growing Roth account as a backup source for withdrawals for spending.

It is unclear if you did this if you could fully convert your tIRA before RMDs start. If that is the case and if you are charitably inclined I would leave some money in the tIRA for QCDs.

 

[SevenUp]

Any thoughts on the two directions.

What will be best for you depends on the amounts you have in the traditional and taxable accounts (and how much interest vs. qualified dividends and long term capital gains that provides), your expected non-tax expenses, and other income (SS, pension, rentals, etc.).

 

[G-Man]

To me, a Roth is equal to a brokerage account if funds are needed. In fact better since Roth withdrawals are tax-free but brokerage funds withdrawals might not be tax-free.

I think it makes sense to use the brokerage funds for living, maximize Roth conversions and have the growing Roth account as a backup source for withdrawals for spending.

It is unclear if you did this if you could fully convert your tIRA before RMDs start. If that is the case and if you are charitably inclined I would leave some money in the tIRA for QCDs.

Is it ok to deplete your taxable account before withdrawing from your tax deferred account? My taxable account is also used as by emergency fund as well.

 

[SevenUp]

Is it ok to deplete your taxable account before withdrawing from your tax deferred account? My taxable account is also used as by emergency fund as well.

Usually it makes more sense to withdraw/convert some amounts from the tax deferred account each year, assuming you can do so for a lower marginal tax rate than you'll eventually need to pay at the top of later withdrawals from that tax deferred account.

 

[G-Man]

Usually it makes more sense to withdraw/convert some amounts from the tax deferred account each year, assuming you can do so for a lower marginal tax rate than you'll eventually need to pay at the top of later withdrawals from that tax deferred account.

Please explain in more detail because it's tough when my wife and I pensions alone takes us to the very top of the 12% marginal tax bracket before the married filing jointly standard deduction is applied. Not complaining.

 

[SevenUp]

Usually....

Please explain in more detail because it's tough when my wife and I pensions alone takes us to the very top of the 12% marginal tax bracket before the married filing jointly standard deduction is applied. Not complaining.

What marginal tax rate do you expect to pay when taking SS and RMDs? How does that compare with, say, the 22% you might pay on Roth conversions now?

See Estimating future marginal tax rate and Whether, when, and how much to convert for more.

 

[G-Man]

What marginal tax rate do you expect to pay when taking SS and RMDs? How does that compare with, say, the 22% you might pay on Roth conversions now?

See Estimating future marginal tax rate and Whether, when, and how much to convert for more.

Based on the retirement planning software, when I take RMDs, my marginal tax rate will be 25% in the future which is equivalent to the 22% marginal tax rate I'm in today.

 

[SevenUp]

Based on the retirement planning software, when I take RMDs, my marginal tax rate will be 25% in the future which is equivalent to the 22% marginal tax rate I'm in today.

Paying 22% now is better than paying 25% later. For that matter, paying 24% now is better than paying 25% later.

If you would convert to the top of the 24% bracket now (and if your marginal rate would in fact be 24%, and not something higher due to any credit phase-outs, IRMAA, etc.), would your future marginal rate still be 25% or would it decrease due to a lower RMD?

 

[G-Man]

Paying 22% now is better than paying 25% later. For that matter, paying 24% now is better than paying 25% later.

If you would convert to the top of the 24% bracket now (and if your marginal rate would in fact be 24%, and not something higher due to any credit phase-outs, IRMAA, etc.), would your future marginal rate still be 25% or would it decrease due to a lower RMD?

It would definitely decrease due to the lower RMDs. The higher RMDs is what is taking me to the next marginal tax bracket.

So how would I pay the taxes for the roth conversions if I deplete my taxable account in the earlier years of retirement?

 

[SevenUp]

Paying 22% now is better than paying 25% later. For that matter, paying 24% now is better than paying 25% later.

If you would convert to the top of the 24% bracket now (and if your marginal rate would in fact be 24%, and not something higher due to any credit phase-outs, IRMAA, etc.), would your future marginal rate still be 25% or would it decrease due to a lower RMD?

It would definitely decrease due to the lower RMDs. The higher RMDs is what is taking me to the next marginal tax bracket.

The question really is "how much would the conversions reduce the traditional balance, and thus the RMDs, and thus the marginal tax rate, assuming there will be growth due to the traditional investments?" That's tricky to predict, but you can take your best shot and adjust as needed in future years.

You wouldn't want to convert now at 24% if that much would drop future rates to 12%.

So how would I pay the taxes for the roth conversions if I deplete my taxable account in the earlier years of retirement?

Out of the conversion, assuming you will be age 59.5 or older.

 

[pb4uski]

Is it ok to deplete your taxable account before withdrawing from your tax deferred account? My taxable account is also used as by emergency fund as well.

I was comparing a taxable account with a Roth which is a tax-free account, not a tax-deferred account.

But to answer your question, why not? When our taxable account is gone in a few years, I can just start drawing from either tax-deferred or from tax-free Roth as needed to manage my taxes.

My Roth is better than an emergency fund as by taxable account... if an emergency arises and I sell taxable account investments then there may be adverse tax consequences... OTOH there are NO tax consequences to selling Roth account investments to raise money for an emergency.

 

[pb4uski]

...So how would I pay the taxes for the roth conversions if I deplete my taxable account in the earlier years of retirement?

...Out of the conversion, assuming you will be age 59.5 or older.

Nailed it.

 

[GATime]

I was comparing a taxable account with a Roth which is a tax-free account, not a tax-deferred account.

But to answer your question, why not? When our taxable account is gone in a few years, I can just start drawing from either tax-deferred or from tax-free Roth as needed to manage my taxes.

My Roth is better than an emergency fund as by taxable account... if an emergency arises and I sell taxable account investments then there may be adverse tax consequences... OTOH there are NO tax consequences to selling Roth account investments to raise money for an emergency.

Yea, this is exactly what I'm heading towards now. Currently, using a tax estimator tool I may be able to convert about $80-85k and still stay in the 12% bracket and 0% CG from the brokerage sales.

This was in my head but it helps when others put it in writing.

 

[DrRoy]

It is sometimes recommended to defer taking from tax sheltered accounts in order to maximize compounded returns.

 

[tulak]

Please explain in more detail because it's tough when my wife and I pensions alone takes us to the very top of the 12% marginal tax bracket before the married filing jointly standard deduction is applied. Not complaining.

I would also look at what the tax rates/impact will be when one of you have to file as single. It might add more incentive to draw down the tax deferred accounts.