Is this a good reason not to draw from taxable account first?

[ItDontMeanAThing]

I understand why the conventional wisdom is to draw down taxable accounts before tax deferred. However, what if one had a taxable account equal to 10% of their tax deferred account (and no other significant assets) parked in a fund of highest quality short term bonds at the start of the next major bear market? I'd use the taxable account to pay taxes on ROTH conversions or buy tax-efficient assets.

I prefer responses in the form of rules of thumb or that show the obvious drawbacks of this idea. Trying to calculate the idea's advantage or disadvantage relative to drawing down the taxable account first has too many unknowns to be useful, IMHO.

 

[Animorph]

At 10% I wouldn't worry about it too much. It's handy in an emergency, either as taxable or if you end up Roth converting, available as a lump sum without a big tax hit. The Roth would be a better place for bonds. You could use the tax deferred to fill up a tax bracket and top off your income from the taxable, but only in small amounts.

 

[pb4uski]

+1 but I think it would be better to have some equities in your taxable account if you're in the 15% bracket (or lower) and qualified dividends and LTCG are at 0%. have you used Taxcaster to see what the tax on your planned Roth conversions would be?

 

[prudent_one]

It makes sense to me to use taxable funds to pay taxes on Roth conversions whether or not I knew it was the start of a major bear market.

 

[audreyh1]

I understand why the conventional wisdom is to draw down taxable accounts before tax deferred. However, what if one had a taxable account equal to 10% of their tax deferred account (and no other significant assets) parked in a fund of highest quality short term bonds at the start of the next major bear market? I'd use the taxable account to pay taxes on ROTH conversions or buy tax-efficient assets.

I prefer responses in the form of rules of thumb or that show the obvious drawbacks of this idea. Trying to calculate the idea's advantage or disadvantage relative to drawing down the taxable account first has too many unknowns to be useful, IMHO.

If taxable is only 10% compared to tax-deferred, I don't think you need to worry about drawing from it first. It's probably best to leave it or let it get larger.

 

[ItDontMeanAThing]

+1 but I think it would be better to have some equities in your taxable account if you're in the 15% bracket (or lower) and qualified dividends and LTCG are at 0%. have you used Taxcaster to see what the tax on your planned Roth conversions would be?

Since FIRE I've had equities in my taxable account when there was 2+ years of living expenses (no SS yet) and I was optimistic about the the market. Now I'm pessimistic. I want my reserve in something that isn't going to tank as a bear market in equities.

Yes to Taxcaster. It was key in deciding how much reserve to keep in the taxable. I didn't want to convert too much in one year because the taxes would be OUCH!

 

[ItDontMeanAThing]

If taxable is only 10% compared to tax-deferred, I don't think you need to worry about drawing from it first. It's probably best to leave it or let it get larger.

My conclusion too. If the assumptions of the projection tools turned out to be true, the advantage was small. A reserve for buying or conversion opportunities has more intangible worth to me.

 

[fritz]

We pull Divs, and CGs (when needed) from taxable accounts (40% of investments) to live on currently along with SS - due to ACA subsidy. Will be looking at Roth conversions in a couple of years when Medicare comes into play (Roths are 15% of current investments). We're planning to keep most of our taxable funds for emergencies, large purchases, etc. Want options for access to funds that would minimize the overall taxable cost of any such purchase, and possibly trigger hitting a higher income tax bracket as well, (or selling Roth accounts that provide tax free income through Divs and CGs - also when needed).