Withdrawal Phase Modeling -- Any Suggestions?

[RunningBum]

RunningBum - you are correct, and thank you for helping me to understand (no need to apologize). I thought I could only choose First In First Out (FIFO), or Average Cost, but I see now that there's an option to use Specific Identification (SpecID). If you use SpecID, then it doesn't really matter whether you reinvest or not, as long as you pay close attention when you sell. I'm here to learn, as well as to try to help others, so I do appreciate it when people call me out for saying something wrong!

P.S. I just found this, which may help others using SpecID: "If your taxable income including capital gains is below (for 2019) $78,750 if married filing jointly, long-term capital gains have a 0% tax rate. So you may want to sell the shares with the lowest cost basis. That is, you may want to “harvest” the largest gain possible." My plan, prior to RMD age, is to sell as many shares as possible with the lowest cost basis, while keeping MFJ to <$78.75K, so that my future tax liability is lower.

Your welcome. And on your second paragraph, you are right that there are times when you could be better off take a big gainer if you can still stay at 0% LTCG tax. My preference is to use that space for Roth conversions instead, but either are valid options. IMO space in that 0% LTCG/div window should be fully utilized one way or another. I've been doing that with my son. He's got a taxable account from an inheritance, and I've been having him sell and re-buy after holding > 12 months to take take the gains off the table at 0%. He won't always be able to do this, but he can now.

 

[imnontrad]

Starting the year you turn 63, your MAGI on your income tax return is used to calculate what you pay in Medicare premiums. (Age 63, premiums paid at age 65,, etc). The premiums go up in a stairstep fashion. The initial "step" increase is at %170K, married/ 85K, single.
Although you currently have the 170K level before your Medicare payments would increase, you need to prepare for a time when one spouse has died. You'd hate to set up withdrawal from traditional IRA at 100K and then penalize a surviving spouse.
In addition, a traditional IRS is the worst thing to inherit because the beneficiary pays income tax on the whole thing. A taxable portfolio (inherited at step up basis) and Roth (no tax at all) are great for beneficiaries.
So my strategy is to convert Traditional to Roth each year up to the 85K MAGI limit. Then I live on my pension, savings, and sale of taxable portfolio (figuring in cap gains to the MAGI). My Roth is the last thing that will be tapped.

 

[pb4uski]

My strategy is a little different.

Since DW gets a stepped up basis on taxable equities, I'm leaving those alone to grow.... besides, any LTCG from living off of them reduce the headroom that I have to do withdrawals or Roth conversions. So I'm leaving Roths and taxable alone since as you say... they "are great for beneficiaries".

We're living off of tax-deferred and doing withdrawals to the top of the 12% tax bracket.

 

[meleana]

We have no pensions. Live in expensive NY.

Our FA (fee only) is having us- 63(me) and 65 (husband)- when hubby retires the end of this year-withdraw our yearly income from our taxable brokerage account ($40,000)- which contains about $200,000- and also just under $20,000 from our IRA's ($10,000 each) to stay under what NYS taxes from retirement accounts.

Then he wants us to some Roth IRA conversions and stay under the $101,000 so as to minimize taxes.



I also will need health insurance because I am no longer working and on my husband's plan. He will go on Medicare B and a supplement, but I will not be 65 until a year later.


In the mist of all this we are in the process of trying to sell our home (downsizing) and will be having to rent somewhere for awhile until we can move into our forever home wherever that might me.


Then, he wants us to collect SS at age 70- both of us- and of course then we have to take RMD's from our IRA's going forward.

The whole thing scares the hell out of me.

 

[HI Bill]

Our FA (fee only) is having us- 63(me) and 65 (husband)- when hubby retires the end of this year-withdraw our yearly income from our taxable brokerage account ($40,000)- which contains about $200,000- and also just under $20,000 from our IRA's ($10,000 each) to stay under what NYS taxes from retirement accounts.

Then he wants us to some Roth IRA conversions and stay under the $101,000 so as to minimize taxes.



I also will need health insurance because I am no longer working and on my husband's plan. He will go on Medicare B and a supplement, but I will not be 65 until a year later.


In the mist of all this we are in the process of trying to sell our home (downsizing) and will be having to rent somewhere for awhile until we can move into our forever home wherever that might me.


Then, he wants us to collect SS at age 70- both of us- and of course then we have to take RMD's from our IRA's going forward.

The whole thing scares the hell out of me.

What part scares you? It seems like the distributions are taking taxes into account presently, while lowering RMDs in the future at at 70.

 

[meleana]

What part scares you? It seems like the distributions are taking taxes into account presently, while lowering RMDs in the future at at 70.

Yes-right- but what scares me is no more paycheck from hubby and drawing down our money.


Not to mention additional expenses that will pop up like home selling and buying and moving expenses.

 

[pb4uski]

.... The whole thing scares the hell out of me.

You can always keep working.

.... Our FA (fee only) is having us- 63(me) and 65 (husband)- when hubby retires the end of this year-withdraw our yearly income from our taxable brokerage account ($40,000)- which contains about $200,000- and also just under $20,000 from our IRA's ($10,000 each) to stay under what NYS taxes from retirement accounts.

Then he wants us to some Roth IRA conversions and stay under the $101,000 so as to minimize taxes. ...

But won't the Roth conversions be subject to NYS income tax? This source suggests that it would be.

https://www.tax.ny.gov/pdf/memos/income/m98_7i.pdf

 

[pb4uski]

Yes-right- but what scares me is no more paycheck from hubby and drawing down our money. ....

How much will you be drawing and spending? as a percent of your retirement day stash.... Roth conversions are just moving money from one pocket to another.... same with tIRA withdrawals that are not spent.

For many of us, particularly when investment results are good, our stashes grwo even though we are withdrawing.

 

[meleana]

You can always keep working.



But won't the Roth conversions be subject to NYS income tax? This source suggests that it would be.

https://www.tax.ny.gov/pdf/memos/income/m98_7i.pdf

You know- you are right! The FA missed that and so did I! Now I am even more scared! What else did he miss?

 

[meleana]

How much will you be drawing and spending? as a percent of your retirement day stash.... Roth conversions are just moving money from one pocket to another.... same with tIRA withdrawals that are not spent.

For many of us, particularly when investment results are good, our stashes grwo even though we are withdrawing.

We figure our spending will be about $60,000 per year net ( not including anything else that may come up) and we have to take it out of a brokerage with a bit over $200,000 and a lot of bond mutual funds ( mostly tax efficient) and ETFs and it also has a Dividend Growth Fund and a Value Fund.

Then we will Also have to Pay taxes out of it at the end of the year whatever they may be.

 

[meleana]

You can always keep working.



But won't the Roth conversions be subject to NYS income tax? This source suggests that it would be.

https://www.tax.ny.gov/pdf/memos/income/m98_7i.pdf

Actually- the more I think about it- it doesn't matter. Yes- NYS will tax anything over $20,000 from the IRA and Roth conversions.


But the whole idea is to draw down money from the IRA's so as to lower the tax torpedo at age 70 1/2.


So we can still consider that $20,000 IRA withdrawal from the IRA's NYS tax free and, of course, the withdrawals from the Roth conversion will be taxed.



But at least we getting some more money out of the IRA.


The FA said alternately- instead of taking our living expenses from the brokerage account, another option could be to just live off our IRA's for the next few years and leave our taxable accounts alone.

 

[RunningBum]

The FA said alternately- instead of taking our living expenses from the brokerage account, another option could be to just live off our IRA's for the next few years and leave our taxable accounts alone.

To me that depends on how big of a gains you'd have to take selling taxable, and whether you see yourself leaving much to your heirs.

My plan is to leave the big gainers in taxable so that if I leave that behind, my heirs get stepped up basis.

For shares with small gains (or no gains or losses), I'd liquidate as needed and use the space to convert tIRA funds to a Roth, since the Roth will grow tax free.

What constitutes a "big" gain is up to you. I haven't figured out the math but I've got some taxable shares that have doubled so I'm selling those last, or not at all.

 

[meleana]

To me that depends on how big of a gains you'd have to take selling taxable, and whether you see yourself leaving much to your heirs.

My plan is to leave the big gainers in taxable so that if I leave that behind, my heirs get stepped up basis.

For shares with small gains (or no gains or losses), I'd liquidate as needed and use the space to convert tIRA funds to a Roth, since the Roth will grow tax free.

What constitutes a "big" gain is up to you. I haven't figured out the math but I've got some taxable shares that have doubled so I'm selling those last, or not at all.

First off, we are not rich enough to worry about leaving money to our son. We have no pensions so we have to live on something. Hopefully he will be able to inherit our home at least, but who knows?



In the brokerage we have bond funds and etf's mostly. Just one Dividend Growth and and other Value fund in terms of stocks. We need to live on them for like 4 years or so at the least before SS at 70.


In our IRA's are the more stock and bond mutual funds. We have a very conservative portfolio.


In don't understand math- that is why we hired the FA. When we begin this withdrawal process I will be seeking his assistance as to what to sell.

 

[pb4uski]

Actually- the more I think about it- it doesn't matter. Yes- NYS will tax anything over $20,000 from the IRA and Roth conversions.


But the whole idea is to draw down money from the IRA's so as to lower the tax torpedo at age 70 1/2.


So we can still consider that $20,000 IRA withdrawal from the IRA's NYS tax free and, of course, the withdrawals from the Roth conversion will be taxed.



But at least we getting some more money out of the IRA.


The FA said alternately- instead of taking our living expenses from the brokerage account, another option could be to just live off our IRA's for the next few years and leave our taxable accounts alone.

That's fine... I just wanted to raise the issue of state income taxes on Roth conversions so that you didn't end up with an unexpected state tax bill based on what the FA told you.

I'm doing the alternative strategy because our taxable positions have large unrealized gains that reduce our headroom to take low tax cost tIRA withdrawals or Roth conversions... so we are leaving them alone and living off of tax-deferred money in the hopes of reducing, but not eliminating, the tax torpedo. The surviving spouse or our kids will get a stepped up basis so those gains will never be taxed... our gains are quite significant most of our lots have doubled and our smallest gain is 20%.

 

[Tekward]

Great thread. I was just drafting my spreadsheet. Turning 62 this year and planning on SS at 70.
My big take-away is that we need to start pulling money out of tIRA sooner than expected in order to level income and minimize tax brackets.
Of course that is all directional thinking because many factors can & will change.

 

[thepalmersinking]

So you are saying that as long as your after retirement tax rate is lower than when you are working then you have beat the tax torpedo? Good psychological position!

 

[audreyh1]

So you are saying that as long as your after retirement tax rate is lower than when you are working then you have beat the tax torpedo? Good psychological position!

No, you still have an opportunity to lower the tax torpedo if you retire early before drawing SS or reach RMD age. You really have to look hard at your retirement tax rate once you reach RMD age.

 

[pb4uski]

So you are saying that as long as your after retirement tax rate is lower than when you are working then you have beat the tax torpedo? Good psychological position!

No sure if you have beat the tax torpedo, but in that case deferring has saved you money... basically the difference in marginal rates times with withdrawal.

But you can make it even better if between ER and when pensions and SS start while you are typically in a low tax bracket you are aggressive with withdrawals and Roth conversions.

Since I retired I converted over $250k and paid ~8% in tax vs 28% or more when that income was deferred... saving $50k or more in federal taxes.

 

[Dtail]

No sure if you have beat the tax torpedo, but in that case deferring has saved you money... basically the difference in marginal rates times with withdrawal.

But you can make it even better if between ER and when pensions and SS start while you are typically in a low tax bracket you are aggressive with withdrawals and Roth conversions.

Since I retired I converted over $250k and paid ~8% in tax vs 28% or more when that income was deferred... saving $50k or more in federal taxes.

Was thinking if there would be a situation whereby post 70's withdrawals are at a lower tax rate than let's say 59-70 y.o.
Probably would have to not qualify for SS.......

 

[RunningBum]

Was thinking if there would be a situation whereby post 70's withdrawals are at a lower tax rate than let's say 59-70 y.o.
Probably would have to not qualify for SS.......

Anything is possible, but that would seem unusual for people in ER. Some may be in semi-ER where they have rentals that they give up in later years. Everyone has to look at their own situation; you can't just go by general rules. That's why words like "typically" are used, where conditions match for many but not all.

 

[pb4uski]

Was thinking if there would be a situation whereby post 70's withdrawals are at a lower tax rate than let's say 59-70 y.o.
Probably would have to not qualify for SS.......

One possibility might be deferred comp that must be paid in the first x years after retiring... that might goose income from 59-70 into a higher tax bracket.

Or if the proposed legislation to require inherited tIRAs be paid out over 10 years and you inherit a big one when you retire.

 

[tango2]

Vanguard 's colleen Jaconetti put out a withdrawal type with examples etc. You set a min and max and go from there. You may have to google it but I am sure you can find it. I use it to a degree. I am working so I only had to take out my rmd this year and that was less than 3%withdrawel. But I am going part time in July YEA, so will start using it next year.