Withdrawl Strategies

[wabmester]

Found this on another discussion site.  I have a problem with a couple of the suggestions, but I'll reserve comment for now.


From a tax-efficiency standpoint, you are best off if you put your highest-returning investments in tax-deferred accounts, even if those returns are generated by capital gains rather than income or dividends.

You are also best off deferring the withdrawal of assets from tax-deferred accounts as long as possible, unless you may encounter problems with the excess distributions and accumulations penalty.

Use taxable distributions from your taxable accounts as part of your annual spending amount; do not reinvest taxable distributions unless the total is greater than your annual spending needs.

Keep your portfolio balanced by withdrawing from assets in which you are overcommitted and by shifting assets in tax-deferred accounts.

Rebalancing does not need to be frequent-annually is sufficient. However, your actual portfolio allocations will be constantly changing due to varying performances, and as you withdraw funds to spend. When rebalancing, use an annual snapshot picture of your portfolio that excludes your spending amount.

Don't worry about straying from your desired allocation by a few percentage points-the picture will change throughout the year, anyway.

 

[unclemick]

Things change. Age 49-55 kept high yield and div. stocks in taxable because we needed income. Early pension at 55 and started adding some more div. growth stocks. Never rebalanced (60/40) IRA - Vanguard computers do it automatically.

At age 60 - looking at withdrawal from IRA at 2-3% to stay in the lower tax bracket. Also may Roth some for old (80+) age.

Each individual ER can make the rules apply or not apply as the case may be. Right now we're living cheap in the lowest tax bracket with a margin of safety. Should we move to living 'large' the rules may change.

 

[ats5g]

I'm going to have to disagree with the first sentence, "From a tax-efficiency standpoint, you are best off if you put your highest-returning investments in tax-deferred accounts, even if those returns are generated by capital gains rather than income or dividends."

If your equity mutual funds (or individual stock holdings) are very tax-inefficient, then I can see how you may not want to hold equities in your taxable account. By tax-inefficient, I mean realizing most or all capital gains every year (e.g. most actively managed funds), and by investing in high dividend paying stocks. However, with things like Vanguard's Tax-managed funds, which favor lower dividend paying stocks, and are constantly tax-loss harvesting to offset most future capital gains, it's almost like having a tax-deferred stock fund in your taxable account. I believe that DFA's tax managed funds do the same thing: favor low dividend paying stocks (even in their TM value funds), trade around dividend dates, and constantly tax-loss harvest.

Even though the taxes on qualifying stock dividends has dropped, by paying taxes on dividends every year, you're losing the compounding of those returns. Not to mention that by holding the equities in tax-deferred IRA's (not Roth's though), you lose any stepped up basis for your heirs.

There can also be circumstances when you may not want to let the tax-deferred assets grow as long as possible. For example, RMD's can have a great affect on your SS benefits being taxed. You may want to withdrawal from your IRA's (not Roth's) more than RMD's, or a lot, early in retirment. If you want to leave assets to heirs, again, no stepped up basis for your equities if held in IRA's. I think it all depends on your personal circumstances.

- Alec

 

[wzd]

You are also best off deferring the withdrawal of assets from tax-deferred accounts as long as possible, unless you may encounter problems with the excess distributions and accumulations penalty.

For tax analysis, I like http://www.i-orp.com/ to get an idea. What it showed me is that barring any change in the tax law other than inflation indexed changes, I should be moving money from IRA's to after tax at a rate that maximizes my use of the 15% tax bracket. i.e. make the withdrawals and just move them to taxable funds, even before the IRA monies are needed. This is better than waiting and paying 25% on some of the withdrawals.

Makes sense to me. However I just used ORP to get an idea of what it suggested, and will try to implement the gist of it's recommendation after considering other income and deductions that may affect the tax bracket, and within the constraints of 72(t).

Wayne

 

[unclemick]

My ORP runs kinda show the same thing - except they take both taxable/nontaxable in varying amounts. The IRA is 4 times the taxable pot size. Still playing with ORP and FIREcalc.

 

[wzd]

The other common belief is that Roth IRA's should be left for last. It isn't necessarily true. There are advantages for those inheriting a Roth IRA, but there can also be advantages for drawing on it yourself.

Again, referring to ORP, it shows me drawing my pension (no choice there) and some IRA funds (I think it can not handle SEPP correctly - any comments?), and some after tax monies, in my early years. The tax brackets appear to be maxed out 15% brackets, and I believe it set the IRA withdrawal to do this. The IRA/after tax ration varies, but the IRA withdrawal tax stays in the 15% bracket. Then when my after tax funds run low, it starts drawing on my Roth IRA, all the while maintaining sufficient IRA withdrawals to keep me at what I believe is the top of the 15% tax bracket. Only in very late years does it allow the tax to spill over into the next bracket.

The basic theme seems to be, don't waste any of your 15% tax bracket, if you will be in a higher one at any later time. It seems that the tax bracket issue is much more important than the other factors discussed, including deferring drawing on the Roth IRA to allow tax free compounding and withdrawal.

This was discussed a while ago elsewhere on this board, so look around if you want some other opinions.

Now if I can find the board where there is a recent discussion with some people currently in a 0% tax bracket, maybe I can point them to this issue. It seems that they are "wasting" their 10% tax bracket by doing so...although the idea of paying no taxes is alluring.

Wayne

 

[cute fuzzy bunny]

Yeah, i've thought about converting portions of my IRA every year to Roth status. Problem is I need to calculate my tax load before 12/31 to see how much headroom I've got left to convert without getting nailed on the tax side. Maybe next year. I havent had a LOT of headroom anyhow, and I figure my nominal tax rate when i'm withdrawing the IRA in my 60's may not be that high anyhow. Plus i'm a lazy %*&@#.

And yes, paying no taxes is very alluring. Feels good.

 

[unclemick]

I've been looking at IRA to Roth since 98 - chicken?, lazy? and not yet confident I know how to set up the math to view the risks/rewards. Still looking at 'small' yearly conversions at my low tax bracket for my 'old age' - 80+ yrs. to give 20 yr spans in Roth.