SWR and Taxes - need some basic input

[coltsfan53]

I am 41 and strongly considering ER or semi ER in the next year or so. My question is what is the best way to draw down my portfolio and what TAXES can I expect to pay? My wife plans to keep her job at least part time, thus, the filing together or separately becomes another basic issue. Her part time income is likely to be under $20k.

My SWR is $49k or so on a current $1.3mm portfolio, evenly divided between taxable and tax deferred holdings. Our cost of living is below the $49k so taking less is feasible but not preferable given our penchant for travel.

Thanks for your input.

 

[nun]

I am 41 and strongly considering ER or semi ER in the next year or so. My question is what is the best way to draw down my portfolio and what TAXES can I expect to pay? My wife plans to keep her job at least part time, thus, the filing together or separately becomes another basic issue. Her part time income is likely to be under $20k.

My SWR is $49k or so on a current $1.3mm portfolio, evenly divided between taxable and tax deferred holdings. Our cost of living is below the $49k so taking less is feasible but not preferable given our penchant for travel.

Thanks for your input.

Run your income estimates through turbo tax or one of the online tax calculators. Then you'll see how much you'll need to set aside for Uncle Sam.

 

[2B]

A married couple with no dependents and standard deductions can have an income of about $38,000 and pay 10% maginal federal income tax. You should definitely plan on doing an tIRA to Roth IRA conversion to fill up this level. You could resign yourself to the 15% marginal tax bracket and have an income of around $92,000. You would live on your after tax assets while you do this.

 

[explanade]

Resign themselves to $92k income?

That's almost double what the OP was aiming for. What would be the advantage of withdrawing that much?

 

[pb4uski]

The advantage is that it is better to pay 15% tax on some withdrawals from ER to 70 than a higher tax rate later once SS and any pensions start. Since the money they need to live on in excess of the wife's income can be sourced from taxable savings the tax-deferred withdrawals can be converted to a Roth IRA where any future investment returns on those funds would not be taxed.

In my case, if I don't do any Roth conversions I will be in the 25% tax bracket from age 70 until I die but if I convert to the top of the 15% tax bracket from now until age 70 I will still be in the 25% bracket, but will eventually be back into the 15% bracket.

It is better to pay 15% now than pay 25% later.

 

[RunningBum]

Nobody can even begin to estimate your taxes without knowing your basis vs. your balance in your taxable account. If they are the same, you can withdraw with 0% taxes. Otherwise, you pay 0 or 15% capital gains depending on your income.

The suggestion to model this in turbo tax is a good one, as is developing a plan to do yearly partial conversions to a Roth IRA. Be careful about that 15% bracket, what you really want to do is fill income + Roth conversions + divs + cap gains (less deduction, exemptions, etc) to the 15% bracket. Beyond that, even if your income actually stays in the 15% bracket, each additional dollar pushes a dollar of cap gains or divs from 0 to 15%, for an effective 30% rate. Again, try it out in turbo tax to see.

 

[akck]

The advantage is that it is better to pay 15% tax on some withdrawals from ER to 70 than a higher tax rate later once SS and any pensions start. Since the money they need to live on in excess of the wife's income can be sourced from taxable savings the tax-deferred withdrawals can be converted to a Roth IRA where any future investment returns on those funds would not be taxed.

In my case, if I don't do any Roth conversions I will be in the 25% tax bracket from age 70 until I die but if I convert to the top of the 15% tax bracket from now until age 70 I will still be in the 25% bracket, but will eventually be back into the 15% bracket.

It is better to pay 15% now than pay 25% later.

+1

I plan to do a lot of year-end movement, buying the latest tax software, once it becomes available. At minimum, I hope to be able to manage income so I can drop to the 15% bracket maybe every other year. It will all depend on how much I can get converted before age 70. It might even be better to pay 25% now, in order to pay 15% later. I really won't know until I see where we're at once we are only collecting retirement income.

 

[pb4uski]

...It might even be better to pay 25% now, in order to pay 15% later. ...

Huh? I don't get it. Even paying 25% now rather than 15% later wouldn't make sense.

 

[explanade]

What is a typical RMD going to be from say a 401k that you rolled over to an IRA?

Is there some set percentage?

 

[akck]

Huh? I don't get it. Even paying 25% now rather than 15% later wouldn't make sense.

Let's say I convert $50,000/yr to a Roth for two years at the 25% tax bracket. Also, If I don't convert, RMDs will cause me to be $10,000 into the 25% bracket after age 70. So, I paid an extra $10,000 in taxes over the two years, but it's saving me $1,000 in taxes each year after age 70. So in 10 years, I breakeven, ignoring present values. I also benefit from the gains in the Roth over that time which are not taxable.

 

[explanade]

What is a typical RMD going to be from say a 401k that you rolled over to an IRA?

Is there some set percentage?

So I found this calculator and by default, it assumes a 7% growth rate for the retirement assets, to age 70.

If your retirement assets (401k plus IRA?) were $100k at the end of 2012 and you don't have RMD until over 10 years from now, you the RMD could be $10-15k a year?

 

[kaneohe]

RMD table http://www.irs.gov/pub/irs-tege/uniform_rmd_wksht.pdf
initial divisor about 27 so multiplier is a bit less than 4% similar to SWR

 

[Animorph]

What is a typical RMD going to be from say a 401k that you rolled over to an IRA?

Is there some set percentage?

Look here: http://www.irs.gov/pub/irs-pdf/p590.pdf#page=109

It's just a set number (divide the IRA balance by the number in the chart), depending on age.

http://www.irs.gov/Retirement-Plans...Topics---Required-Minimum-Distributions-(RMDs)

 

[pb4uski]

Let's say I convert $50,000/yr to a Roth for two years at the 25% tax bracket. Also, If I don't convert, RMDs will cause me to be $10,000 into the 25% bracket after age 70. So, I paid an extra $10,000 in taxes over the two years, but it's saving me $1,000 in taxes each year after age 70. So in 10 years, I breakeven, ignoring present values. I also benefit from the gains in the Roth over that time which are not taxable.

No, it doesn't matter. Let's say you had $100k in an IRA and are in the 25% tax bracket.

If you convert $100k to a Roth you would pay $25k in taxes (not $10k). So the $75k left after paying the taxes would grow over 10 years to be $122k at 5% return.

Alternatively, if you keep the $100k in the IRA and it grows at 5% over the 10 years it would grow to be $163k and if you then convert after paying the 25% tax you would end up with $122k.

Either way at the end of 10 years you have $122k in the Roth. The only way you can come out ahead is if the tax rate differs.

 

[kaneohe]

No, it doesn't matter. Let's say you had $100k in an IRA and are in the 25% tax bracket.

If you convert $100k to a Roth you would pay $25k in taxes (not $10k). So the $75k left after paying the taxes would grow over 10 years to be $122k at 5% return.

Alternatively, if you keep the $100k in the IRA and it grows at 5% over the 10 years it would grow to be $163k and if you then convert after paying the 25% tax you would end up with $122k.

Either way at the end of 10 years you have $122k in the Roth. The only way you can come out ahead is if the tax rate differs.

Often if the tax rates now and later are the same, if you do a "full conversion", the Roth is slightly ahead. Suppose you pay the conversion from a taxable side fund instead. Then 100K goes into the Roth.
N yrs later, it doubles to 200K.

Compare w/ TIRA of 100K and 25K side fund in taxable. In N yrs, TIRA becomes 200K and after 25% tax is 150K. 25K side fund also doubles to 50K but after tax is slightly lower so total of TIRA and side fund is 200K less
the tax on side fund.

 

[Animorph]

Often if the tax rates now and later are the same, if you do a "full conversion", the Roth is slightly ahead. Suppose you pay the conversion from a taxable side fund instead. Then 100K goes into the Roth.
N yrs later, it doubles to 200K.

Compare w/ TIRA of 100K and 25K side fund in taxable. In N yrs, TIRA becomes 200K and after 25% tax is 150K. 25K side fund also doubles to 50K but after tax is slightly lower so total of TIRA and side fund is 200K less
the tax on side fund.

+1

You can also look at it as placing the $75k after-tax conversion into the Roth along with $25k from your taxable account. This $25k now grows tax free in the Roth instead of in the taxable account. If you can do this, the Roth is better than the IRA, even if the tax rates remain the same.

 

[kaneohe]

+1

You can also look at it as placing the $75k after-tax conversion into the Roth along with $25k from your taxable account. This $25k now grows tax free in the Roth instead of in the taxable account. If you can do this, the Roth is better than the IRA, even if the tax rates remain the same.

I like this explanation better.............very intuitive w/ no numbers needed.

 

[rayvt]

Yes! Doing a conversion this way (paying the tax with outside money) is essentially a way of putting money into the Roth that you wouldn't otherwise be able to.

As pb4uski said, the end result is the same. It has to be, since multiplication is commutative.

The money in an IRA doesn't all belong to you. 75k is yours, 25k is the IRS's.
But if you pay the tax with other money, you take your 75K out of the IRA, give the IRS their 25K, and put 100K into the Roth.

 

[pb4uski]

While I agree with you all that if you have taxable monies to pay the taxes then you come out a bit ahead, the post I was responding to (post #10) the poster suggested that if you pay the tax from the converted IRA and that tax rate was the same that it was better to convert sooner than later, which I think you would agree is not the case.

 

[tuixiu]

I must be missing something, if one's living expenses are 50k like coltsfan and there is no expectation for that to rise why are we assuming there is a 25% tax rate that needs to be avoided at 70?

 

[pb4uski]

I must be missing something, if one's living expenses are 50k like coltsfan and there is no expectation for that to rise why are we assuming there is a 25% tax rate that needs to be avoided at 70?

Once you add together SS, investment income from taxable accounts and RMDs from tax-deferred accounts that are required beginning at age 70.5 the combination can push you into the 25% bracket depending on your specific circumstances.

Arguably, not a horrible problem to have but 15% is better than 25%.

 

[explanade]

Once you add together SS, investment income from taxable accounts and RMDs from tax-deferred accounts that are required beginning at age 70.5 the combination can push you into the 25% bracket depending on your specific circumstances.

Arguably, not a horrible problem to have but 15% is better than 25%.

Couldn't you then reduce the withdrawals from your taxable accounts then?

Some calculators seem to account for this, asking about your SS and when you plan to take it.


Of course, you may not want to reduce your withdrawals if you need to draw down your taxable accounts anyways, unless you want to leave a large amount of money.

 

[RockyMtn]

I must be missing something, if one's living expenses are 50k like coltsfan and there is no expectation for that to rise why are we assuming there is a 25% tax rate that needs to be avoided at 70?

I would assume that because it is possible that RMD's from IRA, SS, pensions etc could push him into that 25% tax rate as all are considered to be income.

 

[pb4uski]

Couldn't you then reduce the withdrawals from your taxable accounts then?...

Withdrawals from taxable accounts don't affect your taxable income other than perhaps capital gains if your taxable investments have appreciated whereas withdrawals from tax-deferred accounts are generally taxable income (unless some of your contributions were not deductible).

 

[explanade]

Well by the time you hit your 70s, you would expect appreciation.

You have to have a sizable retirement accounts for the RMDs to push you into 25% bracket. But I guess those could grow if you're more than a decade away from 70.5 too.