Spend down taxable IRA first?

[OddGuy]

I know there are numerous threads on the advisable sequence of withdrawals, and most recommend waiting as long as possible before touching the taxable IRAs, but my situation *may* be atypical.

General situation - I'm 59, DW is 56. I'm self-employed with highly variable income (one year $200k, the next $40k, who knows?), DW is a high-earner in a salaried position ($200k+) with great benefits.

- $6M in brokerage accounts, primarily individual stocks and some mutual funds
- $800k IRA (me), $1M 401k (DW)
- debt free in $1M house

My industry is changing massively, and while I enjoy the work, it's conceivable I could have very low income going forward. DW enjoys working, is in a good position that is more protected than many, and intends to work another decade.

Assuming DW does continue in that role for that long, two things are at play:
1. We won't be obligated to go on Medicare until around 2036
2. I will withdraw approx $200k a year ($100k earmarked for "giving with a warm hand" to children/grandchildren)

Does it make sense to draw down my IRA in that time? That will be taxed at whatever our marginal rate is each year, but it will drastically lessen or eliminate an eventual RMD for me, which will have a positive impact on our eventual Medicare costs.

Or should I still focus on tapping the brokerage account for money (not reinvesting dividends or targeting losing stocks to liquidate) that is more tax efficient in the present moment?

 

[junkanoo]

Anyone that has significant taxable assets like you have winners and losers (if you own the underlying assets i.e. stocks). These can be easily offset to provide cash without taxes as they offset each other.

You're in the 24% bracket now. No idea why withdrawing IRA assets makes sense at this point. Much better to wait until your wife retires. This gives you four years until she has to take SS and approximately 9 years before she has to take RMDs to work on Roth conversions WHEN you will be in a lower tax bracket for sure.

What are you doing with the 100K withdrawal not going to heirs?

 

[Sunset]

I don't see why your wife would want to continue to work @200K to age 76, while you are giving away $100K ( $122K after taxes) to the children.

She will basically be working for the children.

You both could easily retire now.

Have you listed all your current expenses so you know how much you actually need (vs want) to spend each year ?

 

[engineernerd]

I would spend from taxable in your shoes. I would also open a Roth IRA (if you don't already have one) via at least a small Roth conversion from the IRA, just to get the 5-year waiting period started. Pay the tax on the conversion from the taxable account. Sounds like your health insurance is not HSA-eligible, if it were I would also recommend funding an HSA account.

 

[PaunchyPirate]

I don't see why your wife would want to continue to work @200K to age 76, while you are giving away $100K ( $122K after taxes) to the children.

She will basically be working for the children.

You both could easily retire now.

Have you listed all your current expenses so you know how much you actually need (vs want) to spend each year ?

Wife is currently 56. Plans to work another decade. That would make her 66, not 76. Not all that uncommon of an age to work to for someone that enjoys to the work.

 

[OddGuy]

Yeah, she loves working. I do, too, but I can't control my industry. And I have expensive hobbies, which I enjoy indulging. We are not the typical profile this site, hence my screen name.

I appreciate all the comments, from all directions. I enjoy hearing different perspectives.

 

[Kings over Queens]

Does it make sense to draw down my IRA in that time? That will be taxed at whatever our marginal rate is each year, but it will drastically lessen or eliminate an eventual RMD for me, which will have a positive impact on our eventual Medicare costs.

Or should I still focus on tapping the brokerage account for money (not reinvesting dividends or targeting losing stocks to liquidate) that is more tax efficient in the present moment?

You could do both. Draw down from the IRA to the top of the bracket and then supplement, if needed, with loss harvest sales. You've got options given the size of the asset bases.

There probably isn't a one size fits all "best" solution.

 

[PaunchyPirate]

OP, if you're a number tinkerer, you might consider signing up for Pralana Online for a one-year subscription ($120 first year, $89?? after) and enter all your info into it. It can help you set your account withdrawal strategy. You can set up multiple scenarios and compare the tax numbers (and more) that pop out of the other side. I find it rather fun to play with as I'm trying to plan out the rest of my retirement years.

 

[OddGuy]

OP, if you're a number tinkerer, you might consider signing up for Pralana Online for a one-year subscription ($120 first year, $89?? after) and enter all your info into it. It can help you set your account withdrawal strategy. You can set up multiple scenarios and compare the tax numbers (and more) that pop out of the other side. I find it rather fun to play with as I'm trying to plan out the rest of my retirement years.

Awesome, thank you!

 

[engineernerd]

One other piece of advice: it's tax-efficient to hold fixed-income investments in tIRA accounts and stock investments in taxable and Roth accounts.

Holding stocks in taxable, especially stocks whose dividends are mostly qualified dividends, lets you take advantage of the lower tax brackets for qualified dividends and capital gains. And holding your slow-growing investments in tIRA accounts limits future RMDs.

 

[thatguy]

What we might have spent down in early retirement, 25 years ago. could have been gone in a few years. I like that it's still here and has grown to 7 figures. It will be helpful to the younger survivor when she looses my pension & SS income.

 

[SnowballCamper]

If you follow the 4% withdrawal guidance ($8M*.04=$320k) you've got a lot of income in retirement, so maybe Roth conversions are a good idea.
I think it's prudent to draw the IRA & 401k to get up to whatever income level you'll have during RMD time, and even a little bit more to offset the higher taxes for the surviving spouse. Multi year tax planning software is helpful to get the numbers close.

 

[RetireBy90]

One suggestion, a mix of traditional IRA, Roth, and after tax funds, and a plan for which fund source to tap for different needs.