Spending strategy for retired couple with no heirs

[mrmonktu]

I am new here; my apologies if I am not posting in the correct forum. I have done a general search and did not find the issue that I need help with, but I am unsure which terms are best to search to get my answer.

Situation: DH and myself are aged 58 & 64, retired, no debts, no heirs. We will need to start pulling from our retirement accounts within the next year. We are both currently on an ACA health plan and DH will remain on one for another 5 years, so for the short term we must keep our income with ACA limits.

Our financial advisor insists that we should pull traditional IRA money first, leaving ROTHS to grow. I know this is the best strategy for most households; however, since we have no one to leave money to (except charities) it seems logical to draw from our ROTHs first as we are most interested in reducing taxes within OUR lifetimes. All financial scenarios indicate that we will have plenty of money left at the end of our lives regardless of what we spend from first.

I read somewhere that those of us in this situation are better to spend ROTHs down *first* and use T-IRAs later for two reasons: 1) we would likely NOT be taxed on any T-IRA money used to pay medical expenses, including nursing home care; and 2) at age 70.5 we can begin QCDs from the T-IRA to leave money to charity without any tax having to be paid on the funds. This also seems like the best strategy to me because of our need to stay within ACA income limits for 5 more years (we would have to withdraw enough from T-IRA in order to cover the taxes, leaving us with less money to use for actual living expenses than it we withdrew from the ROTH).

Question: What source is best to pull from first in our situation and in terms of limiting taxes (rather than continuing to grow wealth)?
Please understand that I *do* understand the principle of saving tax-free ROTH money for last - but as I understand it, this is really for the benefit of heirs, not those who initially invested the money. I also understand that the longer the money stays in T-IRAs the larger the RMDs and taxes.

TIA for your thoughts and advice!

 

[ivinsfan]

You have thrown a lot of items into this question. What is your main concern, lower taxes or cost of HI through ACA? Also even with your spouse turning 65 and going on Medicare, your ACA costs will not be lowered by much, if at all. A lot of couples don't understand that point...You really haven't given enough details for an informed opinion. The thing I've learned about taxes is eventually they have to get paid! How did your advisor explain their point of view on this subject?

 

[GrayHare]

Depends on much much you need for spending. If tIRA withdrawals are sufficient to fund your expenses without triggering any (or little) income tax, and keeps you under ACA, that's a reasonable approach. If tIRA withdrawals bump you high in taxes and IRMAA, then draw from your Retirees Owe Taxes Hah account instead.

 

[Mark1]

DW and I have no heirs and I'm not opposed to spending down Roths in our 60s, but I like to play the game of minimizing our taxes for the duration of our lives. That being the case, my preference is to keep the majority of our Roth money available in case one of dies early and the remaining individual now has to start filing Single instead Married Jointly.

 

[RunningBum]

If you think you won't have to pull from your tIRA unless you hit a major medical or long term care situation, and will otherwise leave the money to charity, I think it makes sense to pull from your Roth.

Itemizing those medical expenses will reduce most of the cost of drawing those funds from your tIRA.

Charities do not have to pay tax on money received from your tIRA.

Take RMDs into account, especially in the case of one surviving spouse, as Mark1 brings up.

 

[SevenUp]

We are both currently on an ACA health plan and DH will remain on one for another 5 years, so for the short term we must keep our income with ACA limits.

Our financial advisor insists that we should pull traditional IRA money first, leaving ROTHS to grow.

In your situation, take a look at Roth Conversion and Capital Gains On ACA Health Insurance. If you do that, what conclusions do you draw?

 

[Dalton]

It doesn't have to be all of one or the other. I pull enough taxable income to at least fill up the standard deduction (0% tax) and the 10% tax bracket (filing as single), some of it is dividends from brokerage account that is taxed as LTCG (0% tax), and I think that gets me up above the ACA minimum (to not get pushed to Medicaid).

Then to pay whatever expenses above that amount, I have the choices to a) pull cash from money market in brokerage and pay no tax on it, b) sell mutual funds in brokerage and pay 0% tax on the gains only, up to the top of that LTCG bracket, or take more money from the tax deferred IRA and pay 12% tax on it up to the top of that 12% bracket. My spending doesn't exceed that 12% bracket, but if it did, I have the money market (cash) that I could use or the brokerage LTCG would be 15% tax rate on the gains only. I want to take enough from the traditional IRAs to pay some taxes and qualify for the ACA subsidy. You could use your Roth to keep your taxes in check, but it's hard to say exactly how you could do it, because we don't know about other income sources like SS or pensions.

You don't know when or how long you may enter long term care to start using medical deductions, but up to that point, your tIRAs are going to be growing, and thus your RMDs will be growing. I intend to continue spending some out of my traditional IRAs every year, in an effort to keep the balance in check so my RMDs aren't unmanageable when it comes to taxes at that time, and I do this despite all the rule of thumb people saying that I should be spending down my brokerage account until I start SS.

 

[walkinwood]

I would recommend using a program like Pralana or RightCapital to model your situation. We're in in a similar situation - no kids & wish to leave most of our leftovers to charity. Your aim should be highest lifetime consumption or lowest lifetime taxes & these programs allow you to model your variables (which account to tap first, age at death, early death of one, return expectations, tax/SS expectations, general & medical inflation rates etc) and see which option gives you the best results. Imho, these programs are worthwhile to compare different models/scenarios, but since the future is unknowable, don't expect exact answers.

 

[Koolau]

Nothing sacred about Roths so it may be worthwhile to draw from them to keep ACA costs down. But I do like Mark1's point about survivorship causing tax problems for the remaining spouse. We likely will face that issue as we have a lot of 401(k) money yet to deal with.

You probably DO need to find some modeling software and I'm not up on that at all.

 

[Dtail]

Do you have a taxable account to withdraw from?

 

[Scuba]

OP, thank you for starting this thread. We are in a similar situation and had no Roth accounts until the last few years. We modeled our situation with i-Orp and a CPA we hired for this purpose, and were told that in our case, there was not a strong reason to have Roth accounts vs TIRA’s. More recently, we have converted about 15% of our TIRA’s into Roth accounts. We still have a lot sitting in the TIRA’s, but withdrawing from them or converting at this point creates a high burden as we now have to worry about IRMAA in addition to our tax rate. Our motivation for our conversions is the impact of large TIRA’s on a single surviving spouse.

 

[ransil]

We are in the same boat.. Thinking I we just join the Blow the dough thread once we settle into many years of retirement to make sure we have enough.

 

[Fermion]

No kids here either and we plan on drawing down Roths first in order to keep the $20,000+ saving from ACA. It would take a lot of RMDs to equal that kind of bird in the hand saving now. Heck, we might even take out a Heloc from age 60 to 65 just to keep that $20,000 a year.