withdrawal strategy during retirement

[kobydog]

Hi! I'm new to this site. I've done a bunch of reading over the years about indexing, SWR etc. I feel comfortable with setting up my asset allocation, the vehicles in each asset allocation and SWR rates.

What I'm stuggling with is how to divvy up my asset allocations between Tira's and taxable account...not in the sense of "which assets are most tax-wise in which account" (I felt comfortable with that, too, BEFORE I retired and had to draw from my portfolio for every day expenses.)

My dilemma is how best to divvy my asset categories in taxable vs tax-deferred while withdrawing my living expenses from these accounts.

I'm currently 60, recently retired. 2/3 of my assets are in taxable account, 1/3 are in Tira. I can live off of 3-4%/yr of my total assets. My overall AA is 55/45 (equity/FI).

Should I have 100% of my equity allocation in taxable account, and withdraw my 3-4%/yr from that account with 1. fixed income interest (remember that I have some FI in the taxable account only because I want to maintain my overall AA) and 2. liquidated equities (to reach the 3-4% SWR that the FI interest does not cover)?

With this scenario, I would keep my Tira assets untouched (until I ran out of taxable assets and/or turned 70 and then I'd be forced to withdraw), and nearly 100% invested in FI vehicles.

I'm trying to be tax-wise. But since I expect to be in 15% marginal bracket, am I just mentally masturbating

What are your thoughts? References?

Thanks,

kd

 

[growing_older]

Have you considered taking some TIRA money and converting it to Roth IRA before your RMDs start. If you've got tax braket room now, you may be able to pay less tax now before you are forced into a higher bracket by RMD.

 

[kobydog]

Growing-older,

Absolutlomondo! My conversion plan will begin in 2008.
Getting back to my OP, though, I'd still try to put off using funds in ALL of my ira's (roth included) for as long as possible....unless I hear good ideas to the contrary!

kd

 

[growing_older]

Have you tried to look at what your projected RMD will be? My inclination is like yours to put off withdrawals from IRAs as long as possible but if the IRA is large enough, when the RMD kicks in your effective tax rate could be higher. If that looks to be the case (and you have to estimate since you don't know for sure returns on invested funds between now and then) then you have other options you could consider. In the years before RMD, I think I have enough time to convert the excess out of TIRA into Roth, but if I don't have enough time, I'm also thinking of taking withdrawals from TIRA to spread out that tax. If the income smoothing for tax purposes means I have to draw down a TIRA before I need to use the income, then I can always reinvest in a taxable (but tax efficient) investment.

 

[Rich_by_the_Bay]

If I'm understanding your question, conventional wisdom is to keep your fixed income bond bucket in tax-sheltered accounts. Nonqualified money can go either in cash (where the gains are small) or stocks (where gains are deferred until sale, and indexed funds - esp tax-managed ones - generate low turnover and sales).

The trickier part is to juggle the net income from each type of withdrawal after taxes. That is, $100 drawn from an after-tax account is essentially $100 to spend. From a tax deferred account, to have $100 to spend in a 20% bracket you need to withdraw $125.

Firecalc helps alot with this type of analysis. For those of us who plan part-time work in early retirement such planning is invaluable.

 

[kobydog]

Growing older,

Re: withdrawing from Tira before RMD is required and reinvesting in taxable portfolio (rather than Roth conversion). I'm hoping to have 10 years in which to covert Tira to Roth (to reduce my RMD once I'm 70)... for the obvious advantage that the $$'s are better off in a Roth rather than a taxable account .
If it looks a though I still have a ways to go after a few years of conversion, I guess I could withdraw from Tira to taxable account also, but I'm really trying to keep marginal tax rate under control during the conversion years. Clearly this plan will require flexibility in planning as the years go by.

Rich in Tampa,

As I stated in my original post, I'm looking for info about what type of assets (equity vs FI) should be held in what type of accounts (tax-deferred vs taxable) and how those assets should be withdrawn to meet expenses. There's tons of info available about how to do this during the "accumulation" years...but I'm having a hard time finding helpful info about this during the "withdrawal" years!! Does Firecalc provide insight for those specific issues? The Firecalc that I've seen previously gives you "success rates" with different SWR's for varying financial situations, not the type of info that I'm looking for...or am I missing something about Firecalc??

kd

 

[hogwild]

Growing older,

....Does Firecalc provide insight for those specific issues? The Firecalc that I've seen previously gives you "success rates" with different SWR's for varying financial situations, not the type of info that I'm looking for...or am I missing something about Firecalc??

kd

koby, Incredibly, Firecalc does not include taxes in its calculations. I would suggest the Fidelity planner or this one:
Online Monte Carlo Retirement Planner

 

[REWahoo]

I'm looking for info about what type of assets (equity vs FI) should be held in what type of accounts (tax-deferred vs taxable) and how those assets should be withdrawn to meet expenses.

Can't help you on the first part of your quest, but on the "how to withdraw" question I suggest you look at the Optimal Retirement Planner (ORP).

 

[tightasadrum]

I'm sure it's no accident that the sites explaining accumulation outnumber the sites for withdrawal by about one-zillion to one. It's a "they get to use it" vs "you get to use it" issue.

I've puzzled over exactly the same issues. I plan to, in fact have already started, move money to ROTH accounts from tax-deferred accounts before MRD days begin too. I suppose it's a good problem to have, but it's still a problem.

 

[LOL!]

The Journal of Financial Planning has withdrawal strategy articles from time to time. Wasn't there one were the result was trivial: withdraw your lowest performing assets first (i.e. fixed income) and never rebalance?

Anyways, if you go to Journal Home Page and search on "withdrawal strategy", one can find FPA Journal - Optimal Withdrawal Strategies for Retirees with Multiple Savings Accounts among many others. (Edit: this paper says withdraw from traditional IRA to fill up your exemptions and standard deductions, then from Roth IRA, result: no taxes! Well, duh!)

Enjoy! (And please summarize all those articles you find for us

 

[OAG]

If one is going to be in the same tax bracket (i.e., say 15%) and not hit the top of it since it is indexed why move Traditional IRA money into a Roth IRA? Seems to me paying tax with todays dollars versus tomorrows dollars, if at the same rate, is not a rational thing to do. Additionally, to make the conversion work well, you would not want to hit the bottom of the next bracket due to the conversion. Also, if one is planing on moving, in retirement, from a state with an income tax versus one what does not have one wouldn't you just be donating tax dollars to the current state that you would not have to in the new state?

 

[FinanceDude]

If one is going to be in the same tax bracket (i.e., say 15%) and not hit the top of it since it is indexed why move Traditional IRA money into a Roth IRA? Seems to me paying tax with todays dollars versus tomorrows dollars, if at the same rate, is not a rational thing to do. Additionally, to make the conversion work well, you would not want to hit the bottom of the next bracket due to the conversion. Also, if one is planing on moving, in retirement, from a state with an income tax versus one what does not have one wouldn't you just be donating tax dollars to the current state that you would not have to in the new state?

Well, in 2010, it becomes easier for higher income earners to do conversions to Roths. I have a number of clients that are interested in that........

 

[Rustic23]

If you could move it to a Roth, and avoid paying tax on your SS would that not be worth it?

 

[OAG]

Personally, my SS benefits will always be taxed no matter what I do, short of refusing to get my Military Retired Pay and hiding cash (CD Ladder) under the mattress. I have decided to look at the flip side of taxation of SS benefits - 15% of them are always TAX FREE rather than look at the other side (up to 85% taxed at my marginal rate).

 

[Bikerdude]

If one is going to be in the same tax bracket (i.e., say 15%) and not hit the top of it since it is indexed why move Traditional IRA money into a Roth IRA?

Well for one thing you may want to make a big purchase in retirement that would push you into a higher bracket. In my State staying under 50K exempts all of my SS from tax so a little Roth money would help me to extend that level. The Roth is exempt from RMD so that is another possible reason to move money to a Roth. And finally I expect taxes to go up not down .

 

[OAG]

Well that may be but why not use after tax money to buy the new Lexus (CD Ladder is all after tax money). I can also see where "one size may not fit all" but personally, as I mentioned, I do not see the financial advantage. Yes, tax rates may change but only for the "rich" not me I am "poor".

 

[bamsphd]

If one is going to be in the same tax bracket (i.e., say 15%) and not hit the top of it since it is indexed why move Traditional IRA money into a Roth IRA? Seems to me paying tax with todays dollars versus tomorrows dollars, if at the same rate, is not a rational thing to do. Additionally, to make the conversion work well, you would not want to hit the bottom of the next bracket due to the conversion. Also, if one is planing on moving, in retirement, from a state with an income tax versus one what does not have one wouldn't you just be donating tax dollars to the current state that you would not have to in the new state?

Want to maximize the amount of money growing in tax sheltered accounts? If you can pay the conversion taxes with money currently in after tax accounts, then converting a T-IRA to a Roth is mathematically equivalent to contributing the tax rate % into a T-IRA, assuming constant tax rates. However, the government allows you to convert, but does not allow the equivalent extra T-IRA contribution.

Have any heirs? They would generally be better off inheriting a Roth than a T-IRA.

Fear taxes might go UP? Roth gives you a partial hedge against that danger.

Want to avoid RMD and squeeze out every year of tax shelter possible? Roth beats the T-IRA if you live long enough.

Want greater control over your tax bracket and perhaps even the tax status of your Social Security? A mix of Roth and after tax money gives you some control. A mix of T-IRA and after tax money gives you far less control.

However, there are possible futures where the T-IRA beats a Roth conversion. The main one is if for any reason you move to a significantly lower tax bracket during the the withdrawal phase than during the conversion phase, then the T-IRA would be better than a Roth conversion. Your what if you move to a lower tax state example being one case where this could easily happen.

Personally, I plan to convert, though not all in one year. I'll spread it over multiple years so that I can minimize my marginal tax rates during the conversion years.

 

[Bikerdude]

Well that may be but why not use after tax money to buy the new Lexus (CD Ladder is all after tax money). l

Well I can only speak for myself, however, all my after tax money will be gone by age 62. I used it to pay for my first 10 years of retirement .

 

[Rustic23]

I don't think this is a concern, but if you convert all your pre tax to after tax pay the tax and then The FAIR tax is implemented and you can pay the tax again.

 

[kobydog]

Thanks for your replies to date.

Some replies and comments:

REWahoo: the ORP calc really doesn't address the issues that I'm trying to resolve (unless I'm using it incorrectly). My OP states what I'm trying to figure out as best as I can state it...the ORP isn't specific enough to begin to answer my questions.

LOL!: The JFA article that you referred to discusses withdrawals from Roth's and Tira's, but (unless I misread) ignores taxable non ira account withdrawals, which contains 2/3 of my assets (as stated in my OP). I'll spend some time scanning the other articles under "withdrawal strategies" and see if there is more relevant info pertaining to my original questions.

To others: I agree with the Tira to Roth conversion (as I had indicated earlier)...bamsphd outlines those Roth advantages well.

tightasadrum: I think you "feel my pain" . I'm unable to find much meaningful info about asset classes/portfolio distribution/withdrawal strategies, which I think has frustrated you too!

The tira to roth conversion, to me, is a no-brainer. But beyond that...I need more info.

kd

 

[simple girl]

Perhaps something in this thread will help:


http://www.early-retirement.org/forums/f26/breathing-down-our-neck-30078.html#post557072

 

[nun]

My dilemma is how best to divvy my asset categories in taxable vs tax-deferred while withdrawing my living expenses from these accounts.

Should I have 100% of my equity allocation in taxable account, and withdraw my 3-4%/yr from that account with 1. fixed income interest (remember that I have some FI in the taxable account only because I want to maintain my overall AA) and 2. liquidated equities (to reach the 3-4% SWR that the FI interest does not cover)?

With this scenario, I would keep my Tira assets untouched (until I ran out of taxable assets and/or turned 70 and then I'd be forced to withdraw), and nearly 100% invested in FI vehicles.

I'm trying to be tax-wise. But since I expect to be in 15% marginal bracket, am I just mentally masturbating

As far as allocation is concerned I'd just apply the standard 60/40 ratio of equity to bonds and fixed income to your taxable and tax deferred accounts. You might have a bit more fixed income or a CD ladder in the taxable accounts if you need to keep a few years expenses in a safe "bucket" and a bit more equity in the tax deferred stuff as it is longer term, but in general just adopt the conventional allocation wisdom.

In the 15% tax bracket I don't think tax advantages investments are required.

Here is an piece about withdrawal strategies. I'd probably withdraw from the tax deferred accounts up to your personal exemption limit, then use your after tax accounts for the rest of my living expenses.


TIAA-CREF Institute | Tax-Efficient Sequencing of Accounts

 

[growing_older]

If one is going to be in the same tax bracket (i.e., say 15%) and not hit the top of it since it is indexed why move Traditional IRA money into a Roth IRA? Seems to me paying tax with todays dollars versus tomorrows dollars, if at the same rate, is not a rational thing to do.

So maybe if you are so well balanced that you can count on this, then moving money to Roth at current lower brackets is pointless for you. But for anyone who has enough money in IRAs that will be pushed into higher taxes by RMDs, getting some of the conversion done while there is still time and room in the lower brackets makes sense. For me, I'm fairly confident that tax rates will be rising from their recent lows, so even if my income (inflation adjusted) remains fairly stable, I think my tax burden will likely rise. I'd like to make use of the low rates while they are available to move pre-tax money to tax-free account (Roth) even if it means paying tax now at a low rate, that will be the same (or possibly higher) in the future. It's a near push if rates don't move, and an advantage if rates move or investment gains knock me into higher brackets later.

 

[tightasadrum]

As far as allocation is concerned I'd just apply the standard 60/40 ratio of equity to bonds and fixed income to your taxable and tax deferred accounts. You might have a bit more fixed income or a CD ladder in the taxable accounts if you need to keep a few years expenses in a safe "bucket" and a bit more equity in the tax deferred stuff as it is longer term, but in general just adopt the conventional allocation wisdom.

In the 15% tax bracket I don't think tax advantages investments are required.

Here is an piece about withdrawal strategies. I'd probably withdraw from the tax deferred accounts up to your personal exemption limit, then use your after tax accounts for the rest of my living expenses.


TIAA-CREF Institute | Tax-Efficient Sequencing of Accounts

Nun,

This is an excellent, straightforwardly worded article you have provided a link for. The only problem I struggle with on Roth conversion is how much to convert before I trigger a tax increase. I've almost always done my own taxes, but I may cave in this year for some CPA advice to find the tax trigger point.

The article also jogged my memory about another thing. For someone who finds him/herself faced with an RMD-induced tax bracket increase, there are solutions to this. One is to invest in investment real estate directly as the owner/manager of the property. From my personal experience I can assure you that there is a significant tax advantage to this, even with a positive cash flow. There is a ton of interest write-off and depreciation expense that will really work in your favor. And, as reference in the article, the asset resets when passed to your heirs, so all the deprecation expense is excused. Your heirs simply sell the property when you're gone and pocket the equity, inheritance taxes notwithstanding. Of course you must be willing to put up with the headaches that go with managing the property as many threads have previously groaned about.

 

[kobydog]

Tightasadrum,

If you overshoot on your Roth conversion amount (and push yourself into a higher tax bracket), you can "recharacterize" your conversion..I'm not sure how complicated this is, but here is a link:
Recharacterizing Your IRA Contribution or Roth Conversion

Also, couldn't you do the conversion after Jan 1 '08 (but before April 15, '08) so that you can calculate your taxes after Jan 1 and then decide how much you can "convert" to Roth for 2007 without moving to a higher bracket in 2007?

Comments?

kd