Withdrawal tax impact

[SilentWalker]

I have been FI for a while now and starting to feel like late this year or early next year might be the perfect time for me to clock out of the megacorp world. DW who is a lot younger than I will continue working but her income is fairly modest so I am going to need to withdraw 50k per year from my portfolio to cover most of our expenses.

I really lack understanding about taxation of withdrawals. My initial thought has been to earmark $1.25M of my portfolio as a source of this regular 50k withdrawal and put it in either Vanguard Wellesley Admiral or Vanguard Managed Payout Fund and use WR 4% on this portion of my portfolio while keeping rest of my portfolio (mostly deferred) untouched and invested with 60/40 allocation (well, probably will be doing Roth conversions but that's another topic).

How do I know which one of these two funds will be more tax efficient? DW's income is fairly limited and will be virtually tax free because it will be spent entirely on our pre-tax insurance payments, her retirement savings and HSA savings.

[Scuba]

Mutual funds are less tax efficient than ETF's in general. Funds include information about their tax efficiency in the fund disclosure.

[evilanne]

Your post isn't very clear. Is the 1.25 portfolio in taxable brokerage account? If so, it will be taxed as investment income, LT or ST capital gains or losses based on your transactions. It really depends on how long you have held the assets in the account but typically since there is a cost basis involved and the capital gains rates are preferential, your tax bill should be lower than drawing from a tax deferred account. Short term gains/losses are taxed as ordinary income. If you sell everything in the portfolio to buy funds mentioned, however, you could have a huge tax impact so I wouldn't recommend doing it all at once. It also depends on what other income you have during the tax year since capital gains rate is based on your marginal tax rate. If everything is tax deferred you can roll it over to another account without any tax impact but then withdrawals are at ordinary income.

Withdrawals & conversions to Roth from tax deferred accounts are taxed as ordinary income. If you are under 59.5, there is 10% penalty in addition to tax unless an exception applies.

[SilentWalker]

Quote:

Originally Posted by evilanne Your post isn't very clear. Is the 1.25 portfolio in taxable brokerage account? If so, it will be taxed as investment income, LT or ST capital gains or losses based on your transactions. It really depends on how long you have held the assets in the account but typically since there is a cost basis involved and the capital gains rates are preferential, your tax bill should be lower than drawing from a tax deferred account. Short term gains/losses are taxed as ordinary income. If you sell everything in the portfolio to buy funds mentioned, however, you could have a huge tax impact so I wouldn't recommend doing it all at once. It also depends on what other income you have during the tax year since capital gains rate is based on your marginal tax rate. If everything is tax deferred you can roll it over to another account without any tax impact but then withdrawals are at ordinary income. Withdrawals & conversions to Roth from tax deferred accounts are taxed as ordinary income. If you are under 59.5, there is 10% penalty in addition to tax unless an exception applies.

The initial point of my question was just to compare the tax efficacy of 50k annual withdrawal from VWIAX vs. VPGDX when it is our only taxable income. Seems nothing is ever as simple as I hope...

The 1.25M is coming from stock option payouts and non-qualified deferred pay which will be all cash payments the day I quit my job. A massive tax hit initially but nothing I can do about it. I would buy the retirement income fund of choice immediately after retirement when I get my hands on the cash in which case I could use other funds for the first year to avoid ST capital gains.

Good point about having to wait until 59.5 before starting Roth conversions. I am 53 now.

We will have no other significant income. As I mentioned DW's salary will be used up pre-tax and most of my other monies are in deferred retirement accounts and taxable brokerage account which is currently 100% VTI. Hoping there is no need to touch any of that for 15 years. I will eventually get a pension but not starting that until at 62 earliest.

Hope this fills some of the earlier gaps. Thanks for the useful input.

[pb4uski]

An important thing to keep in mind is that if your total income is in the 15% tax bracket or lower, then all qualified dividends and long-term capital gains are taxed at 0%.

Our taxable portfolio is totally equities... 80% of my dividends are tax-free and are LTCG and I carefully manage my portfolio to avoid short-term capital gains. The 20% of dividneds that are not qualified are from international stock investments .... my effective tax rate on all my taxable account funds is negative because the foreign tax credit far exceeds the modest tax on unqualified dividends.

While I'm not familiar with it, there is also a play on your stock option payouts to have net unrealized appreciation taxed at lower capital gains rates rather than ordinary income, but I assume that you are all over that.

You can do Roth conversions at any age without penalty.... the penalty only applies if you do tIRA withdrawals before age 59 1/2.