Asset Class Withdrawal Timing Strategies

[TromboneAl]

The discussion of Roth RMDs got me looking again at the timing of withdrawals, and which assets to take out first, second, last, etc.

The conventional wisdom is to take from you taxable account first, then tIRA then Roth.

This article pointed out a strategy I hadn't considered: If we delay SS until 70, we could get a lot of our money out of our IRAs prior to that date ("stockpiling" it), and thus reduce or avoid the taxation of our SS payments.

Another thing I was thinking about is the advice to withdraw from the Roth account last. The thinking is that there are no RMDs for the Roth, and because it compounds tax free, you want to leave it as long as possible.

I've concluded that RMDs are irrelevant to us, so I'm wondering whether the tax-free compounding is worth not withdrawing from the Roth earlier, and thus deferring tax payments. That is, if you take from the Roth, you pay less taxes, and can leave more money in the other accounts. But tax-free compounding probably trumps that.

 

[PaddyMac]

We plan on delaying SS, in part because of the tax issue.

We also plan to withdraw enough from IRAs to be in the 15% bracket, then top up with selling iBonds, or using Roth or Taxable account withdrawals. The idea of spending taxable first is nonsense, imo, as it ignores taxes.

 

[LOL!]

The i-orp calculator suggests that one start withdrawing from Roth earlier than anticipated in order to keep taxable income low while still also withdrawing from the Traditional IRA. After all, there is that 0% tax bracket that will always be there, so you should save some of your tIRA to fill up that bracket. No need to save the Roth for the future if you are just going to use it to fill up that 0% bracket.

In other words, don't pay taxes on converting everything without looking at the whole future picture.

So even the traditional IRA gives you tax-free compounding if the withdrawals are taxed at 0%. Same goes for the taxable account: You get tax-free compounding if you don't pay taxes on your LT cap gains and qualified dividends.

 

[Animorph]

My calculations say taxable first until we can't do Roth conversions anymore. Which is until the taxable funds run out for us. Then IRA withdrawals up to the tax bracket with Roth withdrawals filling in the rest of our expenses. Given time, RMD's look like they will dominate for a while, replenishing the taxable accounts. We should have a few years during that time when we can resume Roth conversions. If we live past 100 the traditional IRAs are depleted and we live off the taxable accounts. In our late 120's (!) the taxable funds are again exhausted and we switch to all Roth all the time.

It would be nice to reduce those RMD's and stay in the lower tax bracket, but additional Roth conversions at the higher bracket marginal tax rates in significant amounts don't result in more allowable spending for us according to my calcs.

 

[haha]

The discussion of Roth RMDs got me looking again at the timing of withdrawals, and which assets to take out first, second, last, etc.

As best I know, there is no RMD for one's own Roth account.

I also cannot see any rational reason to withdraw from a Roth in any circumstance other than one is about to run out of money. You already paid tax on this, and can trade it, accept high otherwise taxable interest returns, all for free. The assets in a Roth are super-money.

Ha

 

[justplainbll]

As best I know, there is no RMD for one's own Roth account.

I also cannot see any rational reason to withdraw from a Roth in any circumstance other than one is about to run out of money. You already paid tax on this, and can trade it, accept high otherwise taxable interest returns, all for free. The assets in a Roth are super-money.

Ha

+1
We did the bulk of our ROTH conversions in 2010, and barring unforeseen circumstances, do not anticipate touching that asset pool until 2025.

 

[pb4uski]

+1
We did the bulk of our ROTH conversions in 2010, and barring unforeseen circumstances, do not anticipate touching that asset pool until 2025.

+2 Where can you get a better after-tax return? Like Ha said - super money.

 

[MichaelB]

The conventional wisdom is to take from you taxable account first, then tIRA then Roth.

Wouldn't you pay less tax if you spread out the distributions of the tIRA over your expected life span and took them evenly?

 

[pb4uski]

Wouldn't you pay less tax if you spread out the distributions of the tIRA over your expected life span and took them evenly?

I think it would depend on the amounts of the tIRA distributions. Every situation is unique.

 

[TromboneAl]

The discussion of Roth RMDs...

As best I know, there is no RMD for one's own Roth account.

Ha

Quite right, I should have written "The discussion of Roths, IRAs, and RMDs..."

 

[DoingHomework]

I was about to post a question on a closely related topic. Since this thread is not quote fully necrotic I'll post my question here even though it might be changing the topic slightly.

When we retire early in a few years my wife will have a decent-sized pension but we'll be making up the rest from taxable accounts. That seems to be in line with the conventional wisdom...but we don't have a whole lot of choice because we'll be well under 59.5.

As I look at taxes it appears as though my wife's pension income will be the only taxable income we have (plus some investment income in taxable accounts of course). Together those will be less than the top end of the 15% tax bracket. When I look farther down the road it also seems to be the case that our combined RMDs will modestly exceed our needs as soon at they kick in. And the issue of increasing how much of our SS is taxable seems to be relevant as well.

Together these things make me conclude that we should be withdrawing from tax deferred accounts as soon as possible to "fill up" our 15% bracket even if the money is just redeposited back in taxable accounts. My own gigantic spreadsheet seems to show that...and even that exceeding the top of the 15% bracket a little might be good, maybe because of the SS tax issue.

Does that conclusion make sense? It seems to contradict conventional wisdom.

 

[MasterBlaster]

I was about to post a question on a closely related topic. Since this thread is not quote fully necrotic I'll post my question here even though it might be changing the topic slightly.

When we retire early in a few years my wife will have a decent-sized pension but we'll be making up the rest from taxable accounts. That seems to be in line with the conventional wisdom...but we don't have a whole lot of choice because we'll be well under 59.5.

As I look at taxes it appears as though my wife's pension income will be the only taxable income we have (plus some investment income in taxable accounts of course). Together those will be less than the top end of the 15% tax bracket. When I look farther down the road it also seems to be the case that our combined RMDs will modestly exceed our needs as soon at they kick in. And the issue of increasing how much of our SS is taxable seems to be relevant as well.

Together these things make me conclude that we should be withdrawing from tax deferred accounts as soon as possible to "fill up" our 15% bracket even if the money is just redeposited back in taxable accounts. My own gigantic spreadsheet seems to show that...and even that exceeding the top of the 15% bracket a little might be good, maybe because of the SS tax issue.

Does that conclusion make sense? It seems to contradict conventional wisdom.

That's a fairly good strategy, Keep in mind you can take tax-defered money before 59.5 years old without penalty using a 72-T approach.

perhaps you can do even better though.

Check out the ORP calculator and pay attention to what it suggests to do to optimize your after-tax spending. Perhaps some tax-deferred to ROTH conversions would help.

Optimal Retirement Calculator and Retirement Decision Support System

 

[Animorph]

DoingHomework, you mentioned RMD's so it sounds like you have an IRA or 401k. You best bet, as MasterBlaster says, is partial Roth conversions each you up to roughly your 15% tax limit. ORP can give you a detailed plan for that.

 

[DoingHomework]

That's a fairly good strategy, Keep in mind you can take tax-defered money before 59.5 years old without penalty using a 72-T approach.

Check out the ORP calculator and pay attention to what it suggests to do to optimize your after-tax spending. Perhaps some tax-deferred to ROTH conversions would help.

Thanks. I've run the ORP calculator before and just did again. It seems to basically confirm my own idea although I think it does the optimization better. The big thing I missed was that it wants us to do some heavy duty Roth IRA converting in the first few years. I can see why...essentially it is doing what I though should be done by getting money out of IRAs early to avoid RMDs. Bot having never been eligible to contribute directly to a Roth they are not the first thing I think of. During retirement though our income will be lower and we'll become eligible. Woohoo!

 

[DoingHomework]

DoingHomework, you mentioned RMD's so it sounds like you have an IRA or 401k. You best bet, as MasterBlaster says, is partial Roth conversions each you up to roughly your 15% tax limit. ORP can give you a detailed plan for that.

Yep. I figured that out with help of MB and ORP. See my previous message.

Thanks.