Guidance with withdrawal plan

[disneysteve]

Now that retirement is imminent (June), I really need to figure out how to approach the withdrawal stage of investing after decades of accumulation. We have taxable stocks and funds, traditional IRAs, Roth IRAs, a 401k, an inherited traditional and Roth IRA, series I bonds, CDs, Treasuries, and cash accounts. Lots of moving parts and options regarding where to draw from and how to manage and balance taxable income and capital gains so I'm not quite sure where to start.


The easy stuff is to spend interest, dividends, and capital gains from our taxable holdings since those are taxed each year anyway. I'm also taking RMDs from the inherited IRAs. But then what? How do I decide where to draw from next to meet our spending needs? We are on an ACA plan so need to manage our MAGI with the subsidy in mind. My wife is 60 and I'm 59 so we're 5-6 years from Medicare. We also plan to delay SS as long as we can. I think our portfolio will support us nicely until 70.


Despite everything I've read, I'm still kind of lost as to how best to approach this. Any advice or links to articles or calculators or other helpful info would be appreciated.

 

[Lewis Clark]

This blog post explains the drawdown plan for Early Retirement Now. It also contains links to the drawdown plans of 22 other finance bloggers.

https://earlyretirementnow.com/2017/06/28/the-ern-family-retirement-capital-preservation-plan/

 

[FlaGator]

No links or calculators, just what I've done since 2015. I was on ACA for several years recently.

TLDR-You'll spend a lot of time sorting through the lowest taxable impact funds to meet spending needs and stay within ACA limits.

-drew down cash from the checking and brokerage accounts, which had been built up in prior years.
-Stopped reinvesting dividends
-withdrew from the HSA, which had been documented and built up without reimbursement for several years previously.
-Sold off all holdings in the taxable account that had losses or very high-cost basis in order to keep taxable gains low
-Only after 8 years were all those exhausted and I needed to pull from the retirement accounts. Was well over 60 then, so no penalties.
-I "converted" funds from the Trad IRA to Roth to start drawing down the retirement accounts.
-I'm in the second year of using the Roth as a "holding tank" for spending. I withdraw Q1 needs from the Trad IRA and move it to regular accounts. The remaining estimated annual need is "converted" to the Roth and drawn down as needed throughout the year. I picked up a not-small-amount of tax-free $$ the last few years doing that.

In the last 2 years, I also benefited from the then-wife having a very good employer health plan, and that carried over to COBRA when she became the ex.

That allowed a lot more flexibility. Prior to that, I spent more time figuring out how to meet spending needs to max out ACA subsidies than I did managing the portfolio. BUT, my annual health care costs now include higher monthly premiums, and no more need to manage income to a certain level for ACA. Now it's IRMMA as I look to Medicare next year. And that's easier and cheaper to manage if I decide to blow through any given level.

 

[monte1022]

We are using taxable with interest to meet the ACA 36k target income for this year. Interest will come in around 25k since some of taxable is in ibonds and other income deferred products. I'll make up the difference with either a Roth conversion or just a plain ole 401k withdrawal (still undecided). If the ACA stays in place until medicare age, then it's rinse and repeat every year. If the taxable is exhausted before we are both on medicare and the ACA sticks around, we will use 401ks to create MAGI and Roths to supplement income without adding to MAGI. Pretax dollars will be used BEFORE SS and AFTER medicare then once SS starts we will supplement with pretax while hopefully preserving the Roths for kids. If the pretax gets exhausted before our end and the tax laws don't change, then it will be SS and Roth ie. no tax. I really want those Roth accounts to be used last or not used at all.

 

[pb4uski]

Now that retirement is imminent (June), I really need to figure out how to approach the withdrawal stage of investing after decades of accumulation. We have taxable stocks and funds, traditional IRAs, Roth IRAs, a 401k, an inherited traditional and Roth IRA, series I bonds, CDs, Treasuries, and cash accounts. Lots of moving parts and options regarding where to draw from and how to manage and balance taxable income and capital gains so I'm not quite sure where to start.


The easy stuff is to spend interest, dividends, and capital gains from our taxable holdings since those are taxed each year anyway. I'm also taking RMDs from the inherited IRAs. But then what? How do I decide where to draw from next to meet our spending needs? We are on an ACA plan so need to manage our MAGI with the subsidy in mind. My wife is 60 and I'm 59 so we're 5-6 years from Medicare. We also plan to delay SS as long as we can. I think our portfolio will support us nicely until 70.


Despite everything I've read, I'm still kind of lost as to how best to approach this. Any advice or links to articles or calculators or other helpful info would be appreciated.

For the next 5 years or so, you will be hamstrung by ACA constraints and it is best to think of reduced ACA subsidies as an incremental tax. Your minimum income will be taxable account income and inherited IRA RMDs.

I assume that income will be insufficient for your spending needs. At the same time, taxable account investments will likely be your best source of spending money while you are constrained by ACA because only the gain adds to income and if you are managing income for ACA the income tax on LTCG should be nil. So, if you will be selling stocks for spending money then add capital gains. If you do nothing else what would your income, income tax and ACA subsidies be?

Then add $10,000 of Roth conversions... how much would your income taxes and ACA subsidies be? The change divided by $10,000 of Roth conversions is your effective tax rate on the conversion that can be compared to your projected tax on RMDs.

If you have enough Roth contribtutions and conversions to fund spending in excess of income, there is a school of thought to just do Roth conversions to some target, pay the tax and then use Roth withdawals for spending since taxable account positions will get a stepped-up basis and thtax on unrealized gains will never become due.

 

[SecondAttempt]

Now that retirement is imminent (June), I really need to figure out how to approach the withdrawal stage of investing after decades of accumulation. We have taxable stocks and funds, traditional IRAs, Roth IRAs, a 401k, an inherited traditional and Roth IRA, series I bonds, CDs, Treasuries, and cash accounts. Lots of moving parts and options regarding where to draw from and how to manage and balance taxable income and capital gains so I'm not quite sure where to start.


The easy stuff is to spend interest, dividends, and capital gains from our taxable holdings since those are taxed each year anyway. I'm also taking RMDs from the inherited IRAs. But then what? How do I decide where to draw from next to meet our spending needs? We are on an ACA plan so need to manage our MAGI with the subsidy in mind. My wife is 60 and I'm 59 so we're 5-6 years from Medicare. We also plan to delay SS as long as we can. I think our portfolio will support us nicely until 70.


Despite everything I've read, I'm still kind of lost as to how best to approach this. Any advice or links to articles or calculators or other helpful info would be appreciated.

I'm in the same boat as you. For decades I have known the general guidelines - taxable first then eligible Roth IRAs then tax-deferred accounts, etc.

But in trying to put together a tactical plan for myself for the next few years I am finding that those rules are much more nuanced these days for two reasons, the ACA and increasing the RMD age to 75. It doesn't seem like there is a simple advice any more. The closest I have come, and this may not be right, just where I currently am in my thinking, is to max out the 12% tax bracket through IRA withdrawals, income, and Roth conversions each year but otherwise try to limit MAGI to maximize the ACA subsidy by making taxable withdrawals. to meet income needs.

I am personally not seeing the benefit of Roth conversions. It seems like their main benefit is to reduce taxes on RMDs later. But I'm 17 years from RMDs, and may not even live to 75. So the net present value of paying taxes on a Roth conversion this year vs taxes on an IRA withdrawal in 17 years does not seem to favor conversions in my case.

I'm still trying to figure this out so don't take this as advice, just sharing my current thought process.

 

[pb4uski]

....I am personally not seeing the benefit of Roth conversions. It seems like their main benefit is to reduce taxes on RMDs later. But I'm 17 years from RMDs, and may not even live to 75. So the net present value of paying taxes on a Roth conversion this year vs taxes on an IRA withdrawal in 17 years does not seem to favor conversions in my case. ...

Roth conversions are only beneficial where the overall tax cost of converting today is less than the projected tax cost of RMDs later. Generally where one is in the 12% bracket or lower no and expect to be in or near the 22% bracket when RMDs hit (because of pension and/or SS) then Roth conversions may be beneficial. But if your already in the 22% bracket and expect RMDs to be 22% or 24% then the bang for the buck is a lot lower.

 

[SecondAttempt]

One thing I am considering but have not modeled yet is to bite the bullet and make a very large IRA withdrawal (about $150,000 but possibly up to $300,000) this year (after I turn 59-1/2). I would pay higher tax this year (24% vs 12%) but it would give me much greater flexibility over the next few years in managing my income for ACA purposes. I will be on COBRA part of this year and next so income is not a factor. So basically I would take the tax hit this year so that my income is very low over the next few years to maximize ACA subsidies until I go on Medicare.

Like I said, I have not modeled it yet so maybe there is a huge issue with this.

 

[SecondAttempt]

Roth conversions are only beneficial where the overall tax cost of converting today is less than the projected tax cost of RMDs later. Generally where one is in the 12% bracket or lower no and expect to be in or near the 22% bracket when RMDs hit (because of pension and/or SS) then Roth conversions may be beneficial. But if your already in the 22% bracket and expect RMDs to be 22% or 24% then the bang for the buck is a lot lower.

And not to get political but we have no idea what tax rates will be like 17 years from now. I don't think our current tax rates are sustainable without major spending cuts and I don't see major cuts to the meaningful programs (SS and defense). That's not expressing a preference, just and observation about reality. But something is going to have to give.

 

[pb4uski]

^^^ That would make Roth conversions more benefical when income tax rates are lower.

 

[rwdflynavy]

And not to get political but we have no idea what tax rates will be like 17 years from now. I don't think our current tax rates are sustainable without major spending cuts and I don't see major cuts to the meaningful programs (SS and defense). That's not expressing a preference, just and observation about reality. But something is going to have to give.

This year the interest we pay on the US Debt will exceed the Defense budget.

 

[pb4uski]

And at the same time, tax rates are historically low but tax increases are off the table.

 

[FLSUnFIRE]

I'm still withdrawing from taxable and have been selling my only individual stock up to my target MAGI. I like the company still but it's a tiny percent of my NW and liquidating it will simplify my financial life a tiny bit with one less account/position to deal with. This year, I'll sell iBonds with crappy yields as well and just keep the ones I bought in the golden age of ~3% real returns. Since you have quite a few accounts, I'd consider housecleaning within the account types as you withdraw and getting rid of small positions that won't impact your AA significantly.

 

[audreyh1]

I don’t worry about taking interest, cap gains etc. during the year. I let them accumulate in the retirement portfolio, and then once a year at the beginning I withdraw a predetermined fixed % and also rebalance to my target AA. These two activities go hand in hand: I might need to sell an asset to meet the withdrawal and I do so in a way that meets the target AA.

I focus on total return, so for me dividends, interest and cap gains distributions are just noise, ha, ha.

Due to cap gains distributions at year end there is often enough cash to cover my withdrawal. But I still may need to sell some assets to rebalance.

The annual withdrawal goes into high yield savings or brokerage MM fund for spending throughout the year - scheduled monthly transfers to checking, etc. I may buy some short term CDs or treasuries with some of it keeping an eye on cash flow needs.

Been doing this for decades and I find it very easy and straightforward.

 

[flyingaway]

One thing I am considering but have not modeled yet is to bite the bullet and make a very large IRA withdrawal (about $150,000 but possibly up to $300,000) this year (after I turn 59-1/2). I would pay higher tax this year (24% vs 12%) but it would give me much greater flexibility over the next few years in managing my income for ACA purposes. I will be on COBRA part of this year and next so income is not a factor. So basically I would take the tax hit this year so that my income is very low over the next few years to maximize ACA subsidies until I go on Medicare.

Like I said, I have not modeled it yet so maybe there is a huge issue with this.

Does it make sense to pay a higher 24% tax this year to reduce the ACA premium at around 8% next year?
I don't know, so I ask the question.

 

[mathjak107]

I don’t worry about taking interest, cap gains etc. during the year. I let them accumulate in the retirement portfolio, and then once a year at the beginning I withdraw a predetermined fixed % and also rebalance to my target AA. These two activities go hand in hand: I might need to sell an asset to meet the withdrawal and I do so in a way that meets the target AA.

I focus on total return, so for me dividends, interest and cap gains distributions are just noise, ha, ha.

Due to cap gains distributions at year end there is often enough cash to cover my withdrawal. But I still may need to sell some assets to rebalance.

The annual withdrawal goes into high yield savings or brokerage MM fund for spending throughout the year - scheduled monthly transfers to checking, etc. I may buy some short term CDs or treasuries with some of it keeping an eye on cash flow needs.

Been doing this for decades and I find it very easy and straightforward.

we are so similar.

in the taxable account we let dividends, interest and fund distributions accumulate towards next years spending .

end of year we see the short fall for the new year , rebalance and refill the new years money .

it was way to hard to live hand to mouth since the amounts varied and our expenses didn’t follow the pay dates .

like lots of insurance products we have due in january and feb … so we found it easier to buffer things for next year