Withdrawal Strategy Help Requested

[connor77]

My wife and I hope to fully punch out this year. I'm 57 and she is 59.



Here are our details:
tIRA $1,286,000 (45% ETFs 55% brokered CDs)

Wife's tIRA $ 895,000 (45% ETFs 55% brokered CDs)
Taxable Brokerage Account $826,000 (50% ETFs 50% brokered CDs)
Wife's Roth $50,000 100% ETF

Checking Acct $100,000
I Bonds $20,000



My wife plans to take SS at 62 or 63 and I will take it at 67. We have no debt, just "regular" bills. We'd like to have $11,500 per month to take care of essential and discretionary as well as taxes.

We met with an Ameriprise rep who happens to be a fishing buddy of mine and he didn't think Roth conversions were necessary. I know very little about how to do them and know very little about whether they would be a good idea for us. This rep suggested taking 4% out of every account to get the money we need to live on each year. Obviously, I will not take any money out of my IRA early to avoid penalties. Probably doesn't make sense to do the substantially equal payments at this point in time.

We have sold a lot of equities over the past year - maybe too many - to get to an asset allocation that will allow us to sleep at night. The proceeds went into CDs with varying maturities paying around 5%.

My rough calculations indicate that, between dividends and interest, our portfolio will throw off around $120k/yr for the next 3 years. Within 3 years, most of our CDs will have matured.

I was hoping to stay in the 12% tax bracket but I don't think this is likely.
I've used the Fidelity calculator and another retirement calculator and it looks like we're in okay shape. We will need health insurance and will likely get a plan from the marketplace (ACA).

My questions are: Should I look into doing any Roth conversions? If yes, how much per year? What's the best way to withdraw from all of our accounts to minimize our tax liability? Should we only hold equity ETFs in our brokerage account or is a combination of ETFs, CDs and CEFs okay?

Our ETF holdings are primarily: VOO, VYM, VTI, VOOG, VUG.
Thanks in advance for any guidance.

 

[retire48in2018]

I’ll let others dive into details

At a high level - I think your AA is too skewed on lower rate investments for your age. I suggest reviewing it collectively and deciding what % equities you are willing to absorb.

As far as withdrawal and tax strategies- below age 59 1/2 - and in your case, there are a vary of options .

For example- I’d consider the brokerage account only. With capital gain tax rules, you can have little to no federal taxes as a strategy and get inexpensive ACA health insurance as well. Perhaps a “high” income year and then 2 or more “low” income years at preferred ACA income targets. You can have little to no federal taxes and very cheap health insurance

-OR- look at longer term tax situations with RMD and convert tIRA to Roth. Recognizing the tax you incur now as well as loss of ACA subsidies.

Those are 2 very different strategies.

 

[VanWinkle]

A combination of income to keep ACA premiums low would include pulling tax deferred from her IRA to cover your standard deduction, pull taxable account through CD's enough to hit your income needs, while keeping your MAGI below 50,000 per year. The interest on CD's will be taxable, but the rest is principal and not taxed. I did this myself at 61 and it worked for me until medicare(65) and SS started at 66. The lower the MAGI, the lower the premiums on the ACA. I would look to my expenses and try to reduce them a little as well. You want to have fun so don't cut back too much.

VW

 

[pb4uski]

From what you posted, I think that Roth conversions will be very beneficial for you, especially pre-SS, but you'll have to do some analysis work for yourself to confirm.

While I know that your first full year of retirement won't be until 2025, let's say that it was 2024. Let's also assume that your taxable account income was $30k... $20k of qualified dividend and LTCG and $10k of ordinary income (interest). Your federal income tax bill would be $0.

You could add $19,200 of Roth conversions and still pay $0 tax so the first $19,200 is a no-brainer. If you converted to the top of the 0% tax bracket for qualified income and LTCG then you could convert $93,250 and would pay $8,422 in tax, a very modest 9.0% (a combination of some at 0%, 10% and 12%).

My guess is that even with Roth conversions that you will be in the 22% tax bracket come RMD time and definitely in the 22% tax bracket if you don't do any Roth conversions. So WADR to your FA/fishing buddy, I think Roth conversions are a slam dunk for you, at least until SS starts. Better to pay 9% now and $0 later rather than $0 now and 22% later (and growth of the IRA between now and later doesn't matter but that is an entirely different analysis and I can explain it if you doubt it).

Also, the ability to do low-tax cost Roth conversions may be a reason to defer SS at 62 for your DW unless her PIA is less than 50% of your PIA. Check out opensocialsecurity.com and be sure to check the checkbox in small print at the top of the page. I personally think that the 2017 CSO mortality tables are more realistic than the SS mortality table.

Also check out https://www.irscalculators.com/tax-calculator to do some of your own tax hypothetical calculations.

You didn't mention anything about ACA subsidies so I assume that perhaps you have retirement medical benefits from work, but if ACA subsidies are in the cards, it would probably blow up the analysis above and shift the above strategy to after you are 65 and on Medicare.

 

[connor77]

You didn't mention anything about ACA subsidies so I assume that perhaps you have retirement medical benefits from work, but if ACA subsidies are in the cards, it would probably blow up the analysis above and shift the above strategy to after you are 65 and on Medicare.

We would benefit from ACA subsidies. We will have no health insurance when my wife leaves her job which could be as soon as April of this year. We would be eligible for and use COBRA for 18 months.



I would be quite happy to start some small'ish conversions especially knowing my tax bill wouldn't be that significant. I saw Midpack's post about the fact that he or she will save $400k in taxes because of Roth conversions.


Should I convert a combination of CD's and ETFs or should I just focus on converting one or the other? Or just convert to keep my AA inline with my comfort level? Should both my wife and me be doing conversions or just me? We could postpone her SS if there was a meaningful benefit to doing so which it sounds like there is.

 

[Gotadimple]

Conversions to a Roth: you get to choose, it doesn't matter whether you sell a CD or sell an ETF. A conversion is a taxable event - money is money - and you need to pay taxes on the extra income added to your other income streams. Many look at where they current income stream takes them in terms of tax bracket and then convert enough so they don't end up in the next higher tax bracket. That's where index ETFs can be helpful as if they are all equity there are no long-term gain distributions that you don't control.

You don't says specifically what's in these ETFs: international stocks, dividend paying stocks, target date ETFs. My question to you is within the 45% how have you divided your investments? Asset allocation matters - you want to keep the investments you have growing to support the lack of growth in CDs. You need CDs (or bonds) to reduce volatility.

I recommend you go to the library and borrow a copy of Rick Ferri's All About Asset Allocation.

 

[pb4uski]

.... Should I convert a combination of CD's and ETFs or should I just focus on converting one or the other? Or just convert to keep my AA inline with my comfort level? Should both my wife and me be doing conversions or just me? We could postpone her SS if there was a meaningful benefit to doing so which it sounds like there is.

It doesn't matter whether CDs or ETFs, but I think ETFs would be better from a tax-efficient placement perspective since it is better to hold high return assets like equities in a Roth all else being equal.

You can do Roth conversions in-kind... just transfer x shares of an ETF from tIRA account to Roth account... no need to sell to convert cash. The conversion value will be based on market value when the transfer takes place.

Each of your tIRAs are so large that whose you use for Roth conversions doesn't matter as you'l unlikely come close to ever converting the entire tIRA. My DW had a much smaller tIRA so we converted hers first and it is now all Roth so we have one less account.

 

[connor77]

You don't says specifically what's in these ETFs: international stocks, dividend paying stocks, target date ETFs. My question to you is within the 45% how have you divided your investments? Asset allocation matters - you want to keep the investments you have growing to support the lack of growth in CDs. You need CDs (or bonds) to reduce volatility.

I recommend you go to the library and borrow a copy of Rick Ferri's All About Asset Allocation.

Our ETF holdings are primarily: VOO, VYM, VTI, VOOG, VUG. Thanks for the tip about Rick Ferri's book.

 

[connor77]

You didn't mention anything about ACA subsidies so I assume that perhaps you have retirement medical benefits from work, but if ACA subsidies are in the cards, it would probably blow up the analysis above and shift the above strategy to after you are 65 and on Medicare.

PB4 - can you give me a little more here? We will need ACA subsidies. I want to be clear with what you mean when you say "blow up" the analysis above. Am I now back to withdrawing 4% from each IRA and Taxable account for living expenses and not doing any conversions until 65 since we need ACA subsidies? Avoiding early withdrawal penalty of course so nothing from my tIRA until 59 1/2. Or am I keeping my MAGI low by just taking from Taxable account for a few years? That's mostly what I have the CDs for or at least that was sort of my plan.

Is a $10k to $20k conversion per year worth it in the grand scheme of things?

 

[pb4uski]

PB4 - can you give me a little more here? We will need ACA subsidies. I want to be clear with what you mean when you say "blow up" the analysis above. Am I now back to withdrawing 4% from each IRA and Taxable account for living expenses and not doing any conversions until 65 since we need ACA subsidies? Avoiding early withdrawal penalty of course so nothing from my tIRA until 59 1/2. Or am I keeping my MAGI low by just taking from Taxable account for a few years? That's mostly what I have the CDs for or at least that was sort of my plan.

Is a $10k to $20k conversion per year worth it in the grand scheme of things?

You have plenty of taxable assets to utilize so forget the 4% mentioned by your fishing chum.

If you are looking for ACA subsidies then I would redo the analysis looking at income taxes and lost ACA subsidies at different levels of Roth conversions. Baseline would be no Roth conversions. Then add a certain amount of Roth conversions and look at the increase in tax and reduction in subsidies combined divided by the amount of conversions. Repeat for higher amounts of conversions looking at the increase in tax/reduction in ACA subsidies divided by the increase in Roth conversions. I would stop where the marginal effective rate for that tranche of conversions is 22%.

Is a $10k to $20k conversion per year worth it in the grand scheme of things? Maybe not but it is easy to do so why not?

 

[jazz4cash]

Why so much in checking? Is it paying any interest?

 

[connor77]

Why so much in checking? Is it paying any interest?

We're just about to have a new roof put on our house ($30k - standing seam metal roof) and we also have to replace our deck which will be at least $20k.
Your point is appreciated. We would ordinarily keep around $30k in checking. Thanks.

 

[Dtail]

Why not keep the checking account balance in a HY online bank savings account and connect that account to your checking account and move the monies as necessary.
You will need to do an analysis of Roth conversion savings vs. MAGI management of income for the ACA. For us, the analysis favored ACA management over Roth conversions until Medicare, then Roth conversions until taking SS.

 

[jazz4cash]

Why not keep the checking account balance in a HY online bank savings account and connect that account to your checking account and move the monies as necessary.
You will need to do an analysis of Roth conversion savings vs. MAGI management of income for the ACA. For us, the analysis favored ACA management over Roth conversions until Medicare, then Roth conversions until taking SS.

Yeah I just had to move funds from Marcus (4.5%) to my local bank for a major expense. The ACH transfer hit in 1 day but I would normally allow 5 days to play it safe. I know there are more sophisticated ways to pay bills from HYSA’s but I never bothered.

 

[connor77]

Why not keep the checking account balance in a HY online bank savings account and connect that account to your checking account and move the monies as necessary.
You will need to do an analysis of Roth conversion savings vs. MAGI management of income for the ACA. For us, the analysis favored ACA management over Roth conversions until Medicare, then Roth conversions until taking SS.

Good idea on using HY savings account and moving money as needed.



I appreciate everyone's help in this thread.

 

[WhenIsItTime]

'within 3 years, most of our CD's will have matured'.

For such a high percentage of AA in fixed income, this would concern me. Rates will likely come down. I think slower and not as far as some hope, but say they settle at 3%. How will you feel about rolling CD's then?

I have a lower WR, but am at 80% equity. My view is I don't need the equity money for at least 3 years so allows time to ride fluctuations in market while seeking higher long term returns.

 

[connor77]

'within 3 years, most of our CD's will have matured'.

For such a high percentage of AA in fixed income, this would concern me. Rates will likely come down. I think slower and not as far as some hope, but say they settle at 3%. How will you feel about rolling CD's then?

I have a lower WR, but am at 80% equity. My view is I don't need the equity money for at least 3 years so allows time to ride fluctuations in market while seeking higher long term returns.

I suspect I went a little too deep on selling equities. That said, I also think equities have risen pretty dramatically recently so I didn't feel awful selling. I'll probably return to something closer to 60% equities 40% safe stuff within the next few years (I get it, I'm trying to time which is a fool's game). To answer your question, I won't feel great about rolling CDs that are only paying 3%.
I might have taken a different approach if we had another $1m to cushion market swings but we're pretty close to being right on the number in terms of what we have in our accounts and what we'd like each month from our portfolio. We can scale back our spending if we have to. The number I gave was the number I'd really like to have but it wouldn't affect us much if we had to reduce our spending by $20k or so each year.

 

[Dtail]

Good idea on using HY savings account and moving money as needed.



I appreciate everyone's help in this thread.

Plus for most HYS accounts, the transfer takes place in 1 business day. It might start at 3 days but after a few transfers, it changes to 1 day.

 

[walkinwood]

Don't know if this was mentioned already. While keeping the same asset allocation, hold equities in taxable accounts first, Bonds in T-IRAs first. Since Bonds typically have a lower total return than stocks, your T-IRAs will grow slower -> lower RMDs.


Open HSA accounts for you & your spouse. It will reduce MAGI for ACA. HSA accounts grow tax free & are tax free on withdrawals for healthcare expenses including some Medicare premiums.


If you qualify for ACA subsidies, weigh that against your wife claiming SS before being eligible for Medicare.


If you qualify for ACA subsidies, consider increasing your income by doing ROTH conversions to the top of the 0% Capital Gains bracket. You'll lose some subsidy amount, but you'll also reduce future RMDs. You'll have to determine if this makes financial sense for you.


See what your ETFs (taxable) distributed last year and use that as a guess for this year. Same with CD interest for this year & use 2023 Turbotax (or create a spreadsheet) to see if you'll be in the 12% bracket, qualify for ACA etc. Worthy exercise.


There are programs like i-ORP which will give you some idea of whether ROTH conversions will be good for you. I wouldn't just take someone's recommendation without examining the reasoning behind it.


You seem to have enough funds (+ SS) to live on your budget comfortably, but put the numbers in Firecalc & see what it spits out. IMHO, most of the above will just tinker at the edges & may give you a little more spending money - nothing that will make a major change to your lifestyle. The one thing that may derail your retirement will be allocating too little to equities or trying to time the market with big changes in your portfolio.

 

[connor77]

Don't know if this was mentioned already. While keeping the same asset allocation, hold equities in taxable accounts first, Bonds in T-IRAs first. Since Bonds typically have a lower total return than stocks, your T-IRAs will grow slower -> lower RMDs.


Open HSA accounts for you & your spouse. It will reduce MAGI for ACA. HSA accounts grow tax free & are tax free on withdrawals for healthcare expenses including some Medicare premiums.


If you qualify for ACA subsidies, weigh that against your wife claiming SS before being eligible for Medicare.


If you qualify for ACA subsidies, consider increasing your income by doing ROTH conversions to the top of the 0% Capital Gains bracket. You'll lose some subsidy amount, but you'll also reduce future RMDs. You'll have to determine if this makes financial sense for you.


See what your ETFs (taxable) distributed last year and use that as a guess for this year. Same with CD interest for this year & use 2023 Turbotax (or create a spreadsheet) to see if you'll be in the 12% bracket, qualify for ACA etc. Worthy exercise.


You seem to have enough funds (+ SS) to live on your budget comfortably, but put the numbers in Firecalc & see what it spits out. IMHO, most of the above will just tinker at the edges & may give you a little more spending money - nothing that will make a major change to your lifestyle. The one thing that may derail your retirement will be allocating too little to equities or trying to time the market with big changes in your portfolio.

Thanks Walkinwood. PB4 mentioned a few of the same things but it's good for us (wife and I) to re-read it. We are leaning towards just keeping our income low for the ACA subsidies but will see what we can do in terms of Roth conversions later. It's likely that we'll be on COBRA for 18 months beginning in May of this year so I have some time to play around with different scenarios. We have a bunch of money in CDs in our taxable account and, as someone mentioned, we'll now plan to use that money for living expenses which will also help me control our income for the next several years to get the best ACA subsidy.

Seems counterintuitive that we'd want our IRA's to grow slower but we understand RMDs just barely well enough that we don't want a huge tax bill.

 

[Dtail]

Thanks Walkinwood. PB4 mentioned a few of the same things but it's good for us (wife and I) to re-read it. We are leaning towards just keeping our income low for the ACA subsidies but will see what we can do in terms of Roth conversions later. It's likely that we'll be on COBRA for 18 months beginning in May of this year so I have some time to play around with different scenarios. We have a bunch of money in CDs in our taxable account and, as someone mentioned, we'll now plan to use that money for living expenses which will also help me control our income for the next several years to get the best ACA subsidy.

Seems counterintuitive that we'd want our IRA's to grow slower but we understand RMDs just barely well enough that we don't want a huge tax bill.

I see that COBRA coverage to start the retirement often.
Have you compared the COBRA rates with a managed MAGI ACA rate?

 

[connor77]

I see that COBRA coverage to start the retirement often.
Have you compared the COBRA rates with a managed MAGI ACA rate?

I won't know the COBRA rate until my wife leaves her company but based on what we paid for COBRA before (she left her job and was later asked to return) and reviewing ACA plans that would be appropriate for us, the numbers are close. Worthy of further review for sure. Thanks Dtail.

 

[Finance Dave]

From what you posted, I think that Roth conversions will be very beneficial for you, especially pre-SS, but you'll have to do some analysis work for yourself to confirm.

While I know that your first full year of retirement won't be until 2025, let's say that it was 2024. Let's also assume that your taxable account income was $30k... $20k of qualified dividend and LTCG and $10k of ordinary income (interest). Your federal income tax bill would be $0.

You could add $19,200 of Roth conversions and still pay $0 tax so the first $19,200 is a no-brainer. If you converted to the top of the 0% tax bracket for qualified income and LTCG then you could convert $93,250 and would pay $8,422 in tax, a very modest 9.0% (a combination of some at 0%, 10% and 12%).

My guess is that even with Roth conversions that you will be in the 22% tax bracket come RMD time and definitely in the 22% tax bracket if you don't do any Roth conversions. So WADR to your FA/fishing buddy, I think Roth conversions are a slam dunk for you, at least until SS starts. Better to pay 9% now and $0 later rather than $0 now and 22% later (and growth of the IRA between now and later doesn't matter but that is an entirely different analysis and I can explain it if you doubt it).

Also, the ability to do low-tax cost Roth conversions may be a reason to defer SS at 62 for your DW unless her PIA is less than 50% of your PIA. Check out opensocialsecurity.com and be sure to check the checkbox in small print at the top of the page. I personally think that the 2017 CSO mortality tables are more realistic than the SS mortality table.

Also check out https://www.irscalculators.com/tax-calculator to do some of your own tax hypothetical calculations.

You didn't mention anything about ACA subsidies so I assume that perhaps you have retirement medical benefits from work, but if ACA subsidies are in the cards, it would probably blow up the analysis above and shift the above strategy to after you are 65 and on Medicare.

I echo this thinking. We are in a similar situation and for us the big factor is whether we do Roth conversions now or not due to the following factors:

1) Doing Roth conversions (at least at any meaningful level) would cause us to lose about $9k in ACA subsidies.

2) However, if we DON'T do Roth conversions we face a high tax bracket for many years once we hit RMD age.

I like the flexibility of not having high RMDs, so I think we're going to do the conversions for at least the next two years (we shall see what happens to the Trump tax cuts) to at least the top of the 22% bracket and possibly well into the 24% bracket...while making sure to avoid IRMAA. This will skinny down our TIRA balances and then we'll be able to a) have lower RMDs later on and b) Have more tax flexibility due to relatively high Roth balances. I am also cognizant of the tax torpedo and widow tax impacts due to high RMDs (former) and if I were to die prior to DW (latter).

Running the numbers gets quite complicated due to ACA subsidy impacts and so on.

Congrats on nearing FIRE! You've done a great job saving! FYI our numbers are close to yours and we spend about $108k/year...so not far off from your numbers although we do have a small company pension and will have in the future (not collecting yet) two moderately high cola-adjusted SS payments.

 

[DrRoy]

I do Roth conversion when the tax bracket we are in is below 20%. Above that, I don't want to pay the tax.

 

[connor77]

I do Roth conversion when the tax bracket we are in is below 20%. Above that, I don't want to pay the tax.

That's a simple formula to follow!


I have the ability to keep my income low for at least the next few years by using my taxable account. I will crunch the numbers as many have suggested but I'd love to find a hybrid solution where I can do some conversions and also get a decent health insurance subsidy. We budgeted for a monthly health insurance bill of $1,500 but it shouldn't be anywhere near that high with any meaningful subsidy.