Am I correct

[makemakeyourfuture]

We are looking to FIRE in 4 years at the end of the year I turn 56. We max out all tax deferred accounts via my current employer via personal contributions / company pension contributions etc to the annual max of 73,500 ( includes catch up provisions) . We also take after tax dollars and invest. Our strategy is to use these after -tax investments as our source of income from 56 to 65 when we would begin to use our pre- tax retirement accounts. I think I have read too many articles that I have spun myself in circles. Is this correct. If we withdraw from our post tax investment accounts ( age 56 to 65), we would take the proceeds less the costs basis and that is what would be capital gains ( assuming held longer than one year). The first $89,250 of that calculation would be free of taxes ( married filling joint)?

 

[Al18]

Based on today’s tax rules, you appear to be correct. The current tax rates will expire 12/31/25, where the rates will increase 2-4% per year. Most on this forum prefer to do RothIRA conversions up to the 12% (15%) rate, so you will be paying taxes on all conversions up until you claim SS benefits.

 

[HI Bill]

If you retire in the year you turn 55 or later, you may be able to take 401(k) distributions prior to 59.5 without the 10% tax penalty. You may want to take a look at your income, post 59.5. If you have larger 401(k) withdrawals plus other taxable income (SS may be taxed up to 85%), you may be better off tapping some of your 401(k) earlier to lessen the tax burden later.

One example for MFJ: Annually, sell 401(k) assets at least equal to the standard deduction for two (currently $25,900). Then you can sell taxable assets with capital gains of up to $89250), and have $0 federal tax liability (although you may have to pay state taxes on the capital gains). I find myself selling more tax-deferred assets now, as I'll be pushed into higher brackets once I hit 59.5. Also, the tax brackets are currently scheduled to go up in 2026.

 

[Morgan22]

Some don't follow the old "wisdom" of spending down after tax accounts first. Some withdraw from both pre-tax and post tax accounts to smooth out and hopefully pay less taxes over your lifetime.

Read through the Kitces article to get an idea. https://www.kitces.com/blog/tax-eff...strategies-to-fund-retirement-spending-needs/

 

[pb4uski]

We are looking to FIRE in 4 years at the end of the year I turn 56. We max out all tax deferred accounts via my current employer via personal contributions / company pension contributions etc to the annual max of 73,500 ( includes catch up provisions) . We also take after tax dollars and invest. Our strategy is to use these after -tax investments as our source of income from 56 to 65 when we would begin to use our pre- tax retirement accounts. I think I have read too many articles that I have spun myself in circles. Is this correct. If we withdraw from our post tax investment accounts ( age 56 to 65), we would take the proceeds less the costs basis and that is what would be capital gains ( assuming held longer than one year). The first $89,250 of that calculation would be free of taxes ( married filling joint)?

Actually, it is better. If you had no ordinary income, in 2023 a married couple could have as much as $116,950 of qualified dividends and long-term capital gains and have $0 in federal income taxes. You need to add the $27,700 standard deduction to the $89,250. Or you could have up to $27,700 of ordinary income and up $89,250 of qualified dividends and long-term capital gains and have $0 in federal income taxes. Or anywhere between $0 and $27,700 of ordinary income and the remainder in preferenced income and pay no federal income tax.

https://www.irscalculators.com/tax-calculator

What I do is withdraw from taxable as needed for our spending and then fill the remainder with Roth conversions.... actually I also fill the 10% and 12% tax brackets with Roth conversions and pay a blended rate of ~12% as I expect that I'll pay ~17% on RMDs when I'm in my 70s so I'll take the 5% of tax savings.... essentially the same strategy recommended in the Kitces link to the post immediately preceeding this post:

...While the strategy of taking partial distributions from an IRA earlier rather than later can be an effective means to enhance the longevity of the portfolio by reducing the average tax rate paid on the IRA, the one caveat to the strategy is that it still depletes a tax-preferenced account earlier than may have been necessary. In other words, the strategy faces a fundamental tension between the desire to take withdrawals earlier (to avoid “wasting” unused low tax brackets in the early years) versus the desire to benefit from tax-deferred compounding growth (by leaving the money in the IRA to compound tax-efficiently over time).

The resolution to this dilemma is to recognize that it’s possible to “fill up” the lower tax brackets in the early years from the IRA, without actually liquidating the tax-preferenced account. The solution is to engage in systematic partial Roth conversions in the early years, moving the dollars from the IRA to a Roth IRA, and generating the taxable income that fills the 15% tax bracket in the early years. ...

I still view this as "spending from taxable". The Roth conversions are just shifting money from my right pocket to my left pocket with a little loose change (the ~12% tax) falling on the ground the process.