Roth IRA contributions best source for non-taxable cash?

[FrankiesGirl]

Just want to check that this is the most efficient way to get cash without popping my taxable income up.

I'm FIREd, use dividends thrown off from taxable brokerage account and RMD from old school cool inherited IRA. Me and the husband both have Roth IRAs but they are not expected to play any big role in our retirement. Also are currently on the ACA for health insurance so I keep our taxable income in the sweet spot range to get maximum subsidies. Currently looking at a slight cash crunch due to some big ticket expenses this year, so need to top up the cash account in some manner.

My understanding is that I can take out any of the contributions I've made penalty free and they will not count towards taxable income either. I don't need a ton - like maybe 10K - and there is more than that in contributions (and it's definitely showing tracked in my accounts and assume that while it is reported to the IRS, all I'd need to do is fill out IRS Form 8606, Nondeductible IRAs - that shows it was withdrawing contributions and therefore not taxable).

Is there something I'm overlooking?

 

[SecondCor521]

If you are over 59.5 and opened your first Roth five tax years ago or more, you can withdraw anything and can skip Form 8606.

If either of those are not true, then yes, you can withdraw contributions from your Roth IRA (either of them) at any time, tax and penalty free, and no impact on your ACA subsidies. In this scenario, you would need to complete Part III of Form 8606 to document that the distribution came from your contributions (which you'll put on Line 22 it looks like).

A couple of points:

1. The main downside of doing this is that the $10K loses the tax free growth it might have had, if it had remained in the Roth.

2. You'll need to save your 8606 in case you do this again in future tax years.

3. Form 8606s are per individual spouse. So if you do a $10K withdrawal from your Roth this year and your spouse does a $5K withdrawal from their Roth IRA next year, you'd have two "series" of Form 8606s going on, yours and theirs. If you both did actions requiring Form 8606 in the same tax year, you'd file two Form 8606s with your return.

 

[Sunset]

The other choice would be to sell any stocks that you have that are in a loss position. Although given the market conditions, most folks probably don't have any.
Also when you sell, be sure to identify the specific lot you want to sell to realize the loss, otherwise a brokerage will use whatever their default is, like FIFO.

 

[Al18]

Many on this forum have suggested keeping 3-5 years in fixed income when retiring early, such as a CD ladder. CD’s can be cashed in to cover large expenses with no taxes.

 

[mrfeh]

Many on this forum have suggested keeping 3-5 years in fixed income when retiring early, such as a CD ladder. CD’s can be cashed in to cover large expenses with no taxes.

Taxes need to be paid on the interest.

 

[Al18]

But cashing in a CD is not a taxable event. Typically a successful retirement includes multiple sources of income, for different purposes.

Cash in a Money Market account or a high yield Savings Account are also good alternatives.

 

[mrfeh]

But cashing in a CD is not a taxable event. Typically a successful retirement includes multiple sources of income, for different purposes.

Cash in a Money Market account or a high yield Savings Account are also good alternatives.

You have to pay taxes on the interest as it accrues. And any untaxed interest when you cash it.

And such interest is taxed as regular income.

 

[Al18]

Yes - been doing this for decades, even while working. This was the reserve cash in case of unplanned expenses.

 

[ShokWaveRider]

If one does not have a "Cash Bucket" for unexpected expenses one's options are limited. I must admit I thought most folks here on ER did.

 

[COcheesehead]

The other choice would be to sell any stocks that you have that are in a loss position. Although given the market conditions, most folks probably don't have any.
Also when you sell, be sure to identify the specific lot you want to sell to realize the loss, otherwise a brokerage will use whatever their default is, like FIFO.

Great idea. This is the reason why I tax loss harvest as they appear since I can carry forward. I am looking at a substantial capital gain next year that will get completely wiped out because of carry forwards and I was never out of the market taking those losses and now ahead in the new positions. Tax loss harvesting can create a nice piggy bank to take gains.

 

[pjigar]

If you give more details (time horizon for which you need extra funds, Are $10K funds needed is an exact number or is there a range you can live with for ACA subsidies, other assets balances, asset location, cost basis for taxable assets, etc.) then someone can give you better ideas. Typically Roth is the last bucket you want to withdraw from.

If your time horizon is small then you can consider 2nd mortgage (or line of credit). Pledged asset line of credit (or margin loan) is also an option. Both these options will have interest but it may be less than lifetime tax saved on potential Roth withdrawals. Time horizon is an important factor. Compounding (on IRA withdrawal) is magical so you will have to do some calculations with real numbers.

 

[gauss]

Roth contribution withdrawals are definitely and option and SecondCor521 did a great job of furthering the explanation in post #2

I had to do something similar a few years ago and this is how I handled it:

#1) First I did a once per year 60 IRA indirect rollover from my Roth IRA back to the same Roth IRA. I took possession of the funds for < 60 days and then repaid the same Roth IRA via rollover contribution. These transactions were reportable on my tax return, but no income tax was due and the Roth IRA received the funds back.

#2) The problem was that I needed the cash for more than 60 days. At that point I was able to take a loan from 401(k) at my former employer. They would allow up to $50,000 in loan balance. I had to pay (after-tax) interest, but it was paid back to myself (but now pre-tax). Also, I was out of the market for the 401(k) assets that I liquidated to fund the loan -- but this was a similar effect to the IRA Rollover described above.

Note: Not all 401(k) plans allow loans to former employees, and not everyone retains their 401(k) after leaving the company.

In the end, this worked out for me for the most part.

-gauss

 

[Mulligan]

If you give more details (time horizon for which you need extra funds, Are $10K funds needed is an exact number or is there a range you can live with for ACA subsidies, other assets balances, asset location, cost basis for taxable assets, etc.) then someone can give you better ideas. Typically Roth is the last bucket you want to withdraw from.

If your time horizon is small then you can consider 2nd mortgage (or line of credit). Pledged asset line of credit (or margin loan) is also an option. Both these options will have interest but it may be less than lifetime tax saved on potential Roth withdrawals. Time horizon is an important factor. Compounding (on IRA withdrawal) is magical so you will have to do some calculations with real numbers.

Those are certainly options to consider to stay under ACA guidelines and preserve the tax status of the Roths. Although OP said Roth wasnt going to be a meaningful contributer to retirement, I personally hoard my Roth and HSA. In fact this month I am sliding $10k out of home equity line of credit to pay for an elective eye surgery and preserving the monies in HSA. My income stream will get the home equity loan paid off in relative short order.

 

[FrankiesGirl]

Thanks so much - this has been really helpful!

So we're both nearly a decade away from 59.5 age wise, but Roth IRAs are both 5+ years old and I can see them being used to bridge occasionally (especially when we get to that age) without depleting them completely. Our Roths are less than 5% of our total portfolio, with contributions only amounting to ~20K total. I do think I want to hold onto the bulk of what's in them and taking 10K won't be significant.

Back when we were working, I was not at all savvy about investing so I just did the basics, and the majority of our investments are in tax deferred accounts.

I tend to keep a cash fund that I top up at the end of the year to pay the following year's expenses so the timeline would be in the next quarter/EOY. I personally don't like keeping more than a year in cash since I do have options, just have to figure out which one makes the most sense.

 

[Exchme]

You should be looking ahead to 2026 when the ACA 4 x FPL cliff returns and you really need to control your AGI.

I would be making cash flow plans now for how to stay under that threshold.

 

[FrankiesGirl]

You should be looking ahead to 2026 when the ACA 4 x FPL cliff returns and you really need to control your AGI.

I would be making cash flow plans now for how to stay under that threshold.

Very good point and something to be aware of. But in our case, we're VERY far from that 400% FPL cutoff point regarding our taxable income.