How to determine how much to withdraw from IRA

[prudent_one]

My old college roommate made pretty good money and has been retired for 2 years. Between their two SS checks, a small pension, and about 2K/month interest from banks they are doing fine. He asked me how to choose the amount to withdraw from his IRA (what factors to consider). He's 69. Has $1.8m in IRAs and $700K in banks and taxable investments. He calculates the IRA withdrawal amount that exceeds $35K will be taxed at 22% based on his other income. And he thinks he should start chipping away at the tax-deferred balances even before RMDs apply, plus he wants to start enjoying his retirement money.

Should he just withdraw up to the top of the 22% bracket? Are there other considerations?

 

[38Chevy454]

$35K isn't even what his RMD will be. If he wants to reduce future tax liability from IRAs he will need to take more now.

Edit: using current RMD factor for 73 years age is 1/26.5 = 3.77%. If his investment of $1.8M goes up to $2M, the RMD is approx $75K.

 

[Al18]

His RMD will likely rise to 100K. The best time to start withdrawing from his IRA or converting to a RothIRA was when he was 59 1/2. He should probably withdraw or convert to a RothIRA to the top of 22% bracket. He may be paying IRMAA also.

It’s a shame he didn’t consult with a CFP in his late 50’s to plan this out.

 

[RetiredHappy]

OP said his friend only retired 2 years ago, at 67. He might not be able to do ROTH conversion earlier if his tax bracket was high.

We never did ROTH conversion and we are currently at 22 to 24% tax bracket with my husband subject to RMD. It's still far lower than when we were working and had a 2-year window to do ROTH conversion but there were financial reasons that we should not do ROTH conversion without forking out even more money than we would have saved.

 

[Koolau]

Agree that doing as much Roth conversion as possible before RMD is the way to go. I wish I'd started sooner and been more aggressive. As it is, I converted all my tIRAs to Roth. Only my 401(k) remains to generate RMDs - and so far, they are still manageable. As I age, RMDs may be more problematic - especially in terms of IRMAA. In addition to Roth conversions, I would be building cash reserves in taxable accounts. We still don't have enough cash. We don't wish to take form Roths so that leaves us with taking extra (over and above RMDs) from the 401(k). YMMV

 

[pb4uski]

My old college roommate made pretty good money and has been retired for 2 years. Between their two SS checks, a small pension, and about 2K/month interest from banks they are doing fine. He asked me how to choose the amount to withdraw from his IRA (what factors to consider). He's 69. Has $1.8m in IRAs and $700K in banks and taxable investments. He calculates the IRA withdrawal amount that exceeds $35K will be taxed at 22% based on his other income. And he thinks he should start chipping away at the tax-deferred balances even before RMDs apply, plus he wants to start enjoying his retirement money.

Should he just withdraw up to the top of the 22% bracket? Are there other considerations?

Not enough information. I would suggest that he do a spreadsheet analysis of his income for the next 10 years and then add in Roth conversions to the top of the tax bracket that he expects to be in once RMDs start. It sounds like he should be converting into the 22% tax bracket.

Estimate Your RMD Using Our Required Minimum Distribution Calculator

The IRS requires you to withdraw a minimum amount from some types of retirement accounts annually. Use this calculator tool to figure out your RMD.

www.aarp.org

 

[TheWizard]

What pb4 said. That's what I did starting in my 60s, doing moderate Roth conversions to "levelize" my AGI so that there was no large jump in AGI or taxes after starting SS at 70 and RMDs at 72...

 

[TheWizard]

OP said his friend only retired 2 years ago, at 67. He might not be able to do ROTH conversion earlier if his tax bracket was high.

We never did ROTH conversion and we are currently at 22 to 24% tax bracket with my husband subject to RMD. It's still far lower than when we were working and had a 2-year window to do ROTH conversion but there were financial reasons that we should not do ROTH conversion without forking out even more money than we would have saved.

This doesn't make a lot of sense. You pay the same tax on withdrawals from a tax-deferred account no matter what the reason: RMD or Roth conversion.
It's true that doing too large of a Roth conversion can cause an even higher tax rate and/or a higher IRMAA bracket...

 

[RetiredHappy]

This doesn't make a lot of sense. You pay the same tax on withdrawals from a tax-deferred account no matter what the reason: RMD or Roth conversion.
It's true that doing too large of a Roth conversion can cause an even higher tax rate and/or a higher IRMAA bracket...

Not sure what you meant. If OP's friend was at the 32% or 35% tax bracket while working, then it made no sense to do ROTH conversion while working because OP said that the friend could now convert up to 22%. If he ROTH converts now at 22% and it's the same when he is doing RMD, then yeah, it makes no sense to do ROTH conversion now.

 

[TheWizard]

Not sure what you meant. If OP's friend was at the 32% or 35% tax bracket while working, then it made no sense to do ROTH conversion while working because OP said that the friend could now convert up to 22%. If he ROTH converts now at 22% and it's the same when he is doing RMD, then yeah, it makes no sense to do ROTH conversion now.

Correct that it seldom makes any sense to Roth convert while still working; that's the time to do Roth CONTRIBUTIONS, however.

Best time to Roth convert is after quitting work and before RMDs start...

 

[Koolau]

Not sure what you meant. If OP's friend was at the 32% or 35% tax bracket while working, then it made no sense to do ROTH conversion while working because OP said that the friend could now convert up to 22%. If he ROTH converts now at 22% and it's the same when he is doing RMD, then yeah, it makes no sense to do ROTH conversion now.

Even if the taxes are a wash (22% vs 22%) it may make sense to Roth convert as Roths have some other advantages (such as inheritance.) But mostly, doing Roth conversions before RMDs helps lower RMDs which grow year on year due to growth and higher factors as one ages out. YMMV

 

[prudent_one]

Thanks to all for the replies. I will print the comments and give them to him (he's not much of a computer user).