Why am I hesitant to withdraw from my Roth?

[corn18]

I retired in 2021 @ 55. The plan was to do 401k to Roth conversions to the top of the 12% tax bracket (rule of 55 allows me to do this without penalty) intermixed with LTCG harvesting @ 0% tax. I knew that I would need to withdraw from my Roth in the years that I did the 0% LTCG harvesting from my taxable account to cover annual expenses. Well, that time is this year and I did my withdrawal from my taxable account and generated $40k in LTCG. That combined with my $56k pension puts me at the top of the 0% LTCG rate bracket. Now it's time to cover my second half expenses which, per the plan, means I should withdraw this from my Roth (I can withdraw with no taxes or penalties). For some reason, I just can't pull the trigger because I am reticent to withdraw from my Roth.

$4,060 2025 total taxes if I withdraw expenses from Roth

$19,219 2025 total taxes if I withdraw expenses from 401k

The 401k withdrawal would still be taxed @ 12%, but I would incur an additional $6,000 of taxes on LTCG. So the net cost of my reticence would be $6,000 (15% LTCG tax on $40,000 gains).

I will have to do this again in the future if I want to harvest all my LTCG @ 0% tax, so I need to fix my brain now.

So, help me do the right thing.

 

[Dash man]

Depending how much you have in your 401k and tIRA, it may be wiser to reduce your tax deferred accounts anyway. You need to consider your future income, including social security and RMDs which may affect if you IRMAA or not. You’re in a sweet spot before Medicare where your income beginning at age 63 can increase your Medicare costs at age 65.
You haven’t given us enough information to provide good advice.

 

[corn18]

Depending how much you have in your 401k and tIRA, it may be wiser to reduce your tax deferred accounts anyway. You need to consider your future income, including social security and RMDs which may affect if you IRMAA or not. You’re in a sweet spot before Medicare where your income beginning at age 63 can increase your Medicare costs at age 65.
You haven’t given us enough information to provide good advice.

I have enough time between now and 70 (SS start) to get all my 401k (that is my only tax deferred account) out @ 12% (15% starting next year) and all of my LTCG harvested @ 0%. The years I do the LTCG harvesting, I need to use my Roth to cover all expenses.

 

[Exchme]

Are you doubting your plan or just having cold feet about spending from Roth? In either case, you have committed to your plan for this year, so just execute the plan this year and you can revisit in the future if you can think of a better plan. Even if you do think of a better idea for the future, 6 months worth of expenses taken from Roth isn't that big of a deal.

 

[Out-to-Lunch]

I think we all are reticent to tap the Roths.

However, perhaps it would help to think about the marginal tax rate if you do 401k withdrawals, which I think will be 27%. That is higher than next year, when you can "restock" from the 401k.

 

[Dash man]

My personal choice has been to let my Roth accounts grow. We have been doing large Roth conversions for several years and pay IRMAA (we are both 68). This may be our last year of Roth conversions unless the tax cuts get extended. At 70 1/2 we will begin using what's remaining in our tax deferred accounts for Qualified Charitable Contributions (QCDs) and likely be done with IRMAA. We can probably live the rest of our lives on our taxable brokerage account and the Roth will go to our boys. That's our plan.
For you, it sounds like you've thought it through. If saving on taxes now helps you with your goals, go ahead and use the Roth.

 

[TickTock]

OP,

The general strategy is to minimize taxes over your lifetime. That might dictate Roth withdrawals. Think about your marginal tax rate. Out-to-Lunch has it right.

 

[RetireBy90]

I’m with dashman, we live off pensions and other income and have been doing Roth conversions with this being last year. I’ll file for SS in Jan and have needs covered, so Roth is for kids and TIRA is for QCDs starting next year (I’ll be 70 in June 26).
I’ve segregated retirement savings and others for long time and now there is really no difference. Hard for me to break that rule of not touching retirement account but once you do it it is easier.

 

[Dtail]

I think in general we are "trained" to not use the Roth unless we have to.

 

[TheWizard]

My Roth IRA is only for infrequent large expenses.
When I bought my new Mustang in the fall of 2023, I might have paid for it from my Roth IRA.
But recent lots in my taxable account were showing losses, so I took the money from there instead.

And as a side note: I eat Loss Aversion for breakfast...

 

[TickTock]

I think in general we are "trained" to not use the Roth unless we have to.

I agree, and it is the conventional accepted wisdom - but it's not always the best choice to pay minimum taxes over time.

 

[ponyboy]

Didn't OP mention in another thread they were in the process of potentially doing something that would make them insanely rich? I may have them mixed up with someone else though.

 

[corn18]

Didn't OP mention in another thread they were in the process of potentially doing something that would make them insanely rich? I may have them mixed up with someone else though.

That's me but that is illiquid and may go to zero (private equity). I have to plan as if the money is gone. If it does hit, taxes will not be a concern.

 

[gauss]

A psychological trick to enable me to take withdrawals from my Roth was as follows.

1. Of the various income producing securities in the account, keep track of the dividends of 2 of them
2. Only withdraw these dividends.

I don't withdraw them as they are earned, but rather only when I need them.

Using this method I can see how many months/years of dividends that have not been withdrawn yet and this gives me reassurance that I am not wildly burning through the Roth.

This adds some structure to Roth withdrawals for me -- YMMV

-gauss

 

[HFWR]

I think the already taxed, exempt from affecting SS taxation feature makes my rather modest Roth the perfect vehicle for the emergency new a/c unit or other relatively high dollar oops.

 

[Koolau]

I think in general we are "trained" to not use the Roth unless we have to.

Yes. I think of Roth money as the last resource. I'm sure there are exceptions which could ultimately save taxes.

 

[Dtail]

Yes. I think of Roth money as the last resource. I'm sure there are exceptions which could ultimately save taxes.

Agree, but can't recall any presentations of this viability. Perhaps it would be too extensive over a lifetime analysis.

 

[yakers]

Besides being a financial issue the Roths are part of our plan to pass on to our 2 boys. So they will get the tax advantage. We told them we have pretty good financial resources and the Roths will be the LAST thing we spend of we have to. We're drawing down traditional IRS and 401K (TSP) and just avoided the 24% tax bracket with the use of QCDs to manage our RMDs.

 

[TickTock]

I think the already taxed, exempt from affecting SS taxation feature makes my rather modest Roth the perfect vehicle for the emergency new a/c unit or other relatively high dollar oops.

Ding ding ding! Winner! A way to avoid the SS tax torpedo. This is an exception to the conventional wisdom of always using tax-exempt money last.

 

[Pointby2]

The 401k withdrawal would still be taxed @ 12%, but I would incur an additional $6,000 of taxes on LTCG.

Could someone explain this to me? I thought 401k withdrawals were simply taxed as income without any further consideration of LTCG or growth.

 

[pb4uski]

I retired in 2021 @ 55. The plan was to do 401k to Roth conversions to the top of the 12% tax bracket (rule of 55 allows me to do this without penalty) intermixed with LTCG harvesting @ 0% tax. I knew that I would need to withdraw from my Roth in the years that I did the 0% LTCG harvesting from my taxable account to cover annual expenses. Well, that time is this year and I did my withdrawal from my taxable account and generated $40k in LTCG. That combined with my $56k pension puts me at the top of the 0% LTCG rate bracket. Now it's time to cover my second half expenses which, per the plan, means I should withdraw this from my Roth (I can withdraw with no taxes or penalties). For some reason, I just can't pull the trigger because I am reticent to withdraw from my Roth.

$4,060 2025 total taxes if I withdraw expenses from Roth

$19,219 2025 total taxes if I withdraw expenses from 401k

The 401k withdrawal would still be taxed @ 12%, but I would ithan $40kncur an additional $6,000 of taxes on LTCG. So the net cost of my reticence would be $6,000 (15% LTCG tax on $40,000 gains).

I will have to do this again in the future if I want to harvest all my LTCG @ 0% tax, so I need to fix my brain now.

So, help me do the right thing.

Do you have cash, bonds or negligibly appreciated stock in your taxable account? I'd use that before the Roth. The sales that generated $40k of LTCG presumably resulted in more cash than that so why can't you use that?

 

[TickTock]

Could someone explain this to me? I thought 401k withdrawals were simply taxed as income without any further consideration of LTCG or growth.

LTCG stack on top of income. So if a dollar of income pushes a dollar of LTCG into the 15% bracket, that's a marginal tax increase on the dollar of income of 15%.