72t distributions as part of an income strategy

[fire_ice]

Greetings. Short-time lurker. First-time poster.

Here are some details upon which to base any evaluation.

Age: 47
Brokerage: $1.2M (includes $60k emergency reserve)
Roth: $137k
IRA1: $565k (potential candidate for 72t distributions)
IRA2: $20k (emergency fund)
Crypto: $50k
Liabilities: $500/month
Discretionary Spending: $2500/month that will increase over time
Strategy: Floor income of $35k annually; increased dividend payout over the next three years; eventual drawdown of brokerage account

I stepped away from work one year ago and have initiated a plan to reposition my brokerage portfolio from a growth orientation to that of a growth with income orientation. It will take approximately three more years to sell off those holdings that remain to avoid long-term capital gains. Hopefully, I will begin to draw some income from new positions as I repurpose that cash. I intentionally didn't sell off those holdings while I worked because the gains would have been destroyed by taxes. Last year, I was able to siphon about $35k in dividend income from my brokerage holdings that exactly covered my expenses; however, I'm concerned about the variability of dividends that might be paid in the future, whether those payouts decrease, or happen at all.

Given the goal, my "Financial Advisor" tried to sell me into an annuity for $600k that would provide $36k annually until my death, and I considered it for a split-second, and dismissed the thought entirely seeing as how it would take 16 years to recoup my investment, it's illiquid, there's no account for inflation, there's no access to growth, and $600k is a lot of money. Instead, my thought is to begin 72(t) distributions from IRA1 using the annuitized method to establish that baseline/floor income of about $35k. I'm only 47, so I'll have to draw this for the next 12.5 years. Fine. With zero growth in IRA1 there's 16 years of funds there at $35k annually. Given this SoSEPP nature of distributions, I avoid the 10% early withdraw penalty. I also pay taxes on that distributed money now, instead of whatever the tax rate may be in the future. Whatever funds remain in IRA1 continue to grow, hopefully. I accept that I with not be able to contribute any funds to IRA1 in the future. I have "emergency" funds in place in IRA2 that I can pull, if needed, and not cause any penalty with respect to the SoSEPP distributions from IRA1.

Whatever happens in my brokerage account is icing on the cake, so to speak. Hopefully, that investment continues to grow.

What are your thoughts about this strategy? Is my approach plausible? Wrong? Ridiculous? A pipe dream? Is there a better way? I'm learning to retire.

 

[Koolau]

Welcome to the Forum.

You're very young which is good for everything but survival of your portfolio. I always recommend that people run FIRECalc to get an idea of where they stand.

My guess is you're okay, but put some numbers and scenarios to FIRECalc and you'll get a better idea. I'm sure some others will chime in on your situation.

Looking forward to you contributing here in the future.

 

[Exchme]

Welcome to the forum!

You have about $2M and are withdrawing $36K/year, so a 1.8% withdrawal rate, which is great.

I don't think the moves you mention are optimal though.

-You don't need to reposition your taxable account for income, that is just costing you taxes, both as you sell and as you increase dividends. Best is to just sell what you need when you need it.​

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-You don't need to tap your traditional IRA, leaving the money protected from tax drag and spending down taxable will generally be a better tax strategy, just put your bonds in your t-IRA. Then the taxes on the investment (ordinary income) matches the taxes on the account.​

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-You don't need an annuity, those are for folks that might run out of money or much older folks where the payout rates are substantially above bond returns. Offering one sounds like the advisor trying to make commission off of you.​

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All of which begs the question "How much are you paying this advisor"?

You have many years in front of you so have to live on 3.5% or so of your money, if your advisor is taking 1%, then you have to live on 2.5%. Not a good bargain. Hang around the forum and ask questions, you'll find everything you need here. Another forum that is quite good (with various experts, but the vibe is often stiff and topics are rigidly limited) is bogleheads.org.

 

[Aerides]

You seem to be focused on dividends for income vs. the typical strategy - growth. That means you'll limit your long term potential, have no control over when your income hits, and generally have to target lower-growth investments, or when adjust/rethink as dividends change.

Others are smarter than this and will chime in, but there's a reason most of us don't have dividend-heavy portfolios.

(but yes 99 percent will agree against the annuity idea).

 

[fire_ice]

All of which begs the question "How much are you paying this advisor"?

The advisor is free from my brokerage firm. I've caught on to the fact that they constantly try to sell me something and may not provide the most sound advice. Hence, I'm here asking for a second opinion of sorts.

 

[rembrandt]

The advisor is free from my brokerage firm. I've caught on to the fact that they constantly try to sell me something and may not provide the most sound advice. Hence, I'm here asking for a second opinion of sorts.

For a small fee...

 

[fire_ice]

You seem to be focused on dividends for income vs. the typical strategy - growth.

Yes, I am focused on income; however, I don't intend to put all my eggs in one basket. I intend to leave at least 50% of my brokerage holdings allocated towards growth-focused index funds.

 

[Stormy Kromer]

The advisor is free from my brokerage firm. I've caught on to the fact that they constantly try to sell me something and may not provide the most sound advice. Hence, I'm here asking for a second opinion of sorts.

I wish this knowledge before I started working with a broker 30 some years ago. They put me in annuity which has performed miserably due to internal expenses (lots of it commission). Then into VUL's with unrealistic expectations and a portfolio which has underperformed the broader indexes by a large margin. The funds in the brokerage paid the FA 1.5% annually, plus they were in funds with internal expenses of around 1%. That's 2.5% off the top.

I started investing new money on my own with VG about 20 years ago and found how easy it is to invest on your own and outperform a FA. If you stay calm and stay the course you'll be fine on your own.

 

[fire_ice]

You seem to be focused on dividends for income vs. the typical strategy - growth. That means you'll limit your long term potential, have no control over when your income hits, and generally have to target lower-growth investments, or when adjust/rethink as dividends change.

Others are smarter than this and will chime in, but there's a reason most of us don't have dividend-heavy portfolios.

(but yes 99 percent will agree against the annuity idea).

That said, it was a mistake to sell those holdings and take the gains when instead, I could have left it alone and siphoned off a little at a time at 0% tax as long as the sale was within the LTCG tax bracket.

 

[zinger1457]

They did modify the 72t interest rate allowed a few years ago so that you could at least go up to 5% withdrawal. Years ago when I was looking at 72t's, and interest rates were low, the most you could pull out was ~2%.

 

[sengsational]

If I had $1.2M in after tax and $0.8M tax advantaged, I'd live off the after tax and pull strategically from pre-tax, dialing in annual income (i.e. fill up low tax brackets and/or qualify for PPACA PTC).

If you haven't done so already, you should have defined asset allocation targets that you can absolutely leave unchanged for at least a decade. In other words, irrespective of tax category, you have X% equities, Y% bonds, Z% hard assets, and Q% crypto.

As you spend out of your after tax, you might need to sell some equities. Equities might be depressed when you need the money. But to keep tight against your asset allocation targets, you buy the same thing in your IRA, so you avoided "selling low."

The idea that you need stocks that throw off dividends is something many of us don't worry about. A company can keep the money and grow or throw off the dividend and not grow as fast as they could have. Long diatribes available in old threads on that topic. My take is taking $1,000 in dividends is equivalent to selling $1,000 of growth stocks (that have no dividend), although you will probably want to leverage the qualified dividends tax advantage to the extent you can.

You have a long retirement ahead, and congrats on taking this step. Firecalc is the 'go-to' calculator here. One word of warning: there's the tendency in modeling that you will be unlucky at every turn. The market will dive permanently, I'll need 15 years of nursing home care, and on and on. Will all twelve of these things go against you? Well, you could be super unlucky, but if you put in worst case scenarios on everything, you'll probably go and start looking for your next job Nobody is as unlucky as to loose on every variable, and if the entire world goes south, you'll be better off than most.

 

[Out-to-Lunch]

Welcome aboard!

 

[bloom2708]

My wife and I are both considering 72T for 5 years.

I think it would work exactly like we need it to. The alternative is using taxable and then doing Roth Conversions. We'll have $500k from a house downsize in 1.5 to 2.0 years.

I kind of like preserving taxable/Roth while spending down the Traditional IRAs before SS kicks in.

I would do 55-60. My wife 57-62 for 72T. Then we both take SS at 62.

 

[surprising]

Don't forget the 0% LTCG tax bracket. For married filing jointly it's up to ~$94K for 2024, single is $47K. Add the standard deduction and you're up to $123K for married, and $61K for single, way more than you need for $35K expenses.

I have a similar strategy where I fund basic living expenses with dividends, but supplement with stock sales as needed each month to cover all expenses. I am reconsidering this strategy to try to avoid any taxes because I think I can keep gains below $123K threshold. But even if I go over, it would only be taxed at 15% which is fine. Nearly all my dividend income is non-qualified, so taxed at ordinary tax rates.

 

[pb4uski]

I agree with your decision to reject the annuity.

I think a better strategy would be to live off of your $1.2m in brokerage, even selling shares if necessary, and then do no tax cost Roth conversions... or perhaps Roth conversions into the 10% or 12% tax brackets if you expect to be in a higher tax bracket once you start SS.

If your $35k of dividend income is all qualified dividends, in 2025 you could do $15k of Roth conversions tax-free (assuming single). You could do as much as $28,350 of Roth conversions and only pay $1,364 in tax... a modest 10% of the $13,350 of conversions subject to tax. If you are subject to state income taxes on Earth then you'll want to factor those into your decision unless you plan to move to a state with no income tax. I would suggest that you convert IRA2 first in the interest of simplification.

IRS & State Tax Calculator | 2005 -- 2024 is a handy tool to test our scenarios.

I think you are too focused on income exceeding your spending. You saved this money for retirement and have positioned yourself to be able to retire early, so stick with the plan and don't limit yourself to only spending income.

Also remember that Roth contributions can be withdrawn without tax or penalty at any time so hopefully you have good records of your Roth contributions.

72t distributions will always be available to you as plan B later, but IMO it is premature to consider them now.

 

[NeilDH]

As you spend out of your after tax, you might need to sell some equities. Equities might be depressed when you need the money. But to keep tight against your asset allocation targets, you buy the same thing in your IRA, so you avoided "selling low."

I really appreciate your advice here, sengsational (which I saw in another discussion first). It has been hugely eye-opening for me; it’s brilliant. So I’ve since rejected my own 72t plans and will be doing this with my taxable (then IRA cash) instead. It’ll be much more flexible, including with tax planning, where the 0% LTCG tax rate will be a big factor.

 

[SnowballCamper]

I'm doing a SEPP on my TSP, for the purpose of leveling income (increase income now so that the bump from RMDs isn't as high). I/we have significant pension income that fills up the 22% bracket.

In your situation, I don't see much advantage to the SEPP. Wouldn't drawing from the brokerage be taxed less than the IRA (at ordinary income rates?). The SEPP is a significant commitment on the IRA that locks it up from any other options, preventing Roth conversions, or other withdrawal exceptions.

 

[fire_ice]

Don't forget the 0% LTCG tax bracket. For married filing jointly it's up to ~$94K for 2024, single is $47K. Add the standard deduction and you're up to $123K for married, and $61K for single, way more than you need for $35K expenses.

I have a similar strategy where I fund basic living expenses with dividends, but supplement with stock sales as needed each month to cover all expenses. I am reconsidering this strategy to try to avoid any taxes because I think I can keep gains below $123K threshold. But even if I go over, it would only be taxed at 15% which is fine. Nearly all my dividend income is non-qualified, so taxed at ordinary tax rates.

Unfortunately, I've already harvested LTCG in a lump sum where I should have left it alone and reaped the benefit over time. At least now, I can sprinkle some of the gains here and there. Dividends generate a taxable event whereas LTCG are taxed at 0%, given a few conditions. I think that i will change my approach to match this strategy.

 

[Al18]

Qualified dividends are taxed the same as LTCG. Most dividends are qualified, unless that are from REITs.

 

[silvor]

Greetings. Short-time lurker. First-time poster.

Here are some details upon which to base any evaluation.

Age: 47
Brokerage: $1.2M (includes $60k emergency reserve)
Roth: $137k
IRA1: $565k (potential candidate for 72t distributions)
IRA2: $20k (emergency fund)
Crypto: $50k
Liabilities: $500/month
Discretionary Spending: $2500/month that will increase over time
Strategy: Floor income of $35k annually;

I didn’t see anyone ask, but you really spend $3k a month? How?

 

[Koolau]

The advisor is free from my brokerage firm. I've caught on to the fact that they constantly try to sell me something and may not provide the most sound advice. Hence, I'm here asking for a second opinion of sorts.

Very wise though not because we are such great financial geniuses but because we've (in aggregate) had a lot of experience. We present quite a range of opinions and everyone is free to choose or reject. AND be certain to choose or reject because we're not paid professionals and YMMV.

 

[TheWizard]

I didn’t see anyone ask, but you really spend $3k a month? How?

He likely hasn't bought new car lately.
Or a boat...

 

[Koolau]

I didn’t see anyone ask, but you really spend $3k a month? How?

We have more contributors here than I would have expected who claim even lower spending. I agree it's a bit difficult to believe, but we are all so different. My overall housing costs come close to $3K/month but I live in two different places. So it all depends on circumstances and expectations. IOW YMMV.

 

[silvor]

We have more contributors here than I would have expected who claim even lower spending. I agree it's a bit difficult to believe, but we are all so different. My overall housing costs come close to $3K/month but I live in two different places. So it all depends on circumstances and expectations. IOW YMMV.

Lol.

When I posted my spending of 60k a year, multiple people questioned it.

 

[Koolau]

Lol.

When I posted my spending of 60k a year, multiple people questioned it.

Yeah, I'm useless at the search function, but I know we've had some surveys on yearly spending and IIRC there were folks citing less than $1K/month. YMMV