funding ER from tIRA and t401k first

[GrayHare]

The general advice is to spend down retirement assets last, which leads to a withdrawal order of non-retirement assets, traditional retirement accounts, then Roth retirement accounts. What about for us FIREees? During the lower-income, lower-tax years after ER but before SS and pensions begin, is it reasonable to change that order and withdraw from tIRA and t401k first to cover expenses?

 

[Lancelot]

I made my first Traditional IRA with drawl last year, up to an amount that keeps me in the 15% tax bracket. I plan to continue doing so until MRD kick in at age 71.

I've done some back of the envelope calculations and at age 71 I do believe I will be in the 25% tax bracket, so in my situation I feel its better to pay the lower tax while I can.

On the other hand, I will probably only be taxed on 5 to 10 thousand at the 25% rate so my effective tax rate won't rise that much.

I do have a modest amount in a Roth, and that will be the last account I draw down, baring an emergency or sudden desire to splurge

 

[Jager]

Given the great disparity among portfolio compositions, I'd say the premise to hold retirement assets until last is an unknowable proposition unless one also considers expected withdrawal amounts and the consequent tax implications, calculated year-over-year and extending until age 70+ when SS and RMD's kick in.

The tax torpedo will hit many.

In my case, I am overweight in traditional IRA/401K accounts and so will, indeed, be overdrawing those accounts (and converting to Roth's) during my sixties.

 

[marko]

The conventional wisdom had been that upon RE, you'd end up in a lower tax bracket.

My worry is that with the government looking for increasingly more revenue, the brackets will change over the next several years. I wonder if making withdrawals at the current "higher" brackets might prove prescient.

In other words, if you'd be paying 25% now, you could be paying 28-30% for the same withdrawal amount in 10 years. Take it now and use your after tax withdrawals as the rates increase? Or does the tax free aspect more than cover that increase?

 

[pb4uski]

Currently 39% taxable, 53% tax deferred and 8% tax-free. ERd at 56. Currently living off taxable and prioritizing tIRA to Roth conversions up to the top of the 15% tax bracket. Paid 7% federal tax on those conversions last year. Once pension and SS start we will likely be a little bit into the 25% bracket for 3-7 years in our 70s, depending on investment results between now and then.

If one of us dies, the survivor would be deep into the 25% tax bracket from 70 on so I think it makes sense to do Roth conversions at 7% to avoid future distributions at 25%. Numbers are even more compelling once state income taxes are taken into account.

 

[BBQ-Nut]

I've done some of my own calculations where I can input different withdrawal percentages from my after tax, tax deferred (401k & tIRA), and tax free (Roth).

I find that I end up with more at 'the end' if I start drawing on my 401k and tIRA before the RMD 'impact'.

But everyone's situation will be different - however, there seems to be more on-line financial discussions that the old rule of thumb waiting to draw on tax deferred accounts 'later' is not necessarily always better.

 

[Animorph]

Doing Roth conversions during your low income period may be your best bet. That means spending down your taxable accounts. Or you could look at it as living off the 401k and converting your taxable account into a Roth. A Roth account should be better than a taxable account.

In my optimizations I always withdrew enough from the 401k/IRA to hit a target tax bracket top. If you require that amount to live on you call it a withdrawal. If you don't require the income then you call it a Roth conversion. Of course you have to do the paperwork properly for either case, but you can think of it that way.

 

[Animorph]

Doing Roth conversions during your low income period may be your best bet. That means spending down your taxable accounts. Or you could look at it as living off the 401k and converting your taxable account into a Roth. A Roth account should be better than a taxable account.

In my optimizations I always withdrew enough from the 401k/IRA to hit a target tax bracket top. If you require that amount to live on you call it a withdrawal. If you don't require the income then you call it a Roth conversion. Of course you have to do the paperwork properly for either case, but you can think of it that way.

Just wanted to add, simply withdrawing (not Roth converting) from a 401k/IRA when you also have taxable accounts is missing a great chance to move some of that taxable account to a Roth. It doesn't cost you any more to do a Roth conversion instead of a straight withdrawal. You still end up with the same 401k/IRA balance and your taxes are the same. But with the conversion you have moved some of your taxable account to a Roth. For free! Without having earned income!

 

[GrayHare]

Just wanted to add, simply withdrawing (not Roth converting) from a 401k/IRA when you also have taxable accounts is missing a great chance to move some of that taxable account to a Roth. It doesn't cost you any more to do a Roth conversion instead of a straight withdrawal. You still end up with the same 401k/IRA balance and your taxes are the same. But with the conversion you have moved some of your taxable account to a Roth. For free! Without having earned income!

That is an excellent point.

 

[pb4uski]

I've done some of my own calculations where I can input different withdrawal percentages from my after tax, tax deferred (401k & tIRA), and tax free (Roth).

I find that I end up with more at 'the end' if I start drawing on my 401k and tIRA before the RMD 'impact'.

But everyone's situation will be different - however, there seems to be more on-line financial discussions that the old rule of thumb waiting to draw on tax deferred accounts 'later' is not necessarily always better.

But... if you have taxable funds, do you end up even better by doing Roth conversions rather than withdrawals?