Withdrawal Strategy

[txtig]

I’d like to get some comments on a withdrawal strategy regarding which accounts we should tap first once we retire. First of all, here’s our stats:

I’m 60. DW is 57.
We are planning to retire in 4 years.
We are planning to take SS at FRA. (66 for me and 66 years +2 months for DW)

I’m forecasting balances of about $3.1 million in IRA accounts and about $500K to $600K in our taxable accounts at our retirement date. No pension.

I’d like to initially be able to spend about $10,000 per month in retirement and want to figure out the most tax efficient way to withdraw our money. Certainly, withdrawing from the taxable accounts first would minimize our tax bill in the first few years of retirement, but once those funds were depleted, we would be subject to a 25% marginal rate on our IRA withdrawals.

I’m thinking the best strategy would be to tap both IRA and taxable accounts such that the withdrawal from the IRA accounts is no more than the top of the 15% tax bracket (currently $72,500 for a joint return). This would stretch out the period where I’d be withdrawing from my taxable account and delay any exposure to the 25% bracket.

Thanks in advance for your comments.

 

[pb4uski]

I think you're on the right path. It was the path I planned but some things got in the way.

I had some substantial cap gains in my taxable accounts and decided that the value of 0% cap gains exceeded the value of IRA/Roth conversions at 15% so in these first few years of retirement I will focus on milking the 0% cap gains for all I can.

Beginning next year Obamacare subsidies will effect my strategy as the economic cost of exceeding 400% FPL but staying in the 15% bracket becomes exorbitant once the lost Obamacare subsidy is included in the analysis. This might be less of an issue for you since you will be closer to Medicare age when you retire depending on what you and DW have for HI plans.

The other thing to keep in mind is that what you can do in IRA>Roth conversions or IRA withdrawals while staying in the 15% bracket will be reduced from the $72,500 for income from your taxable account investments, so assuming a 2% income yield on $550k about $11k (+ any other income you may have).

Making HSA contributions can also help in keeping you within the 15% bracket or effectively expand it.

 

[nun]

RMDs are going to be fun come 70.5. Spending taxable first and doing IRA to ROTH conversions is a standard technique, but you'll have to work out the balance between the size of the conversions and the RMD pot you'll have to get the most tax efficient result and obviously take account of your need for income.....I feel a linear programming exercise coming on.....or you could just run i-orp.

 

[jerome len]

It appears that you'll be taking out about 3.4% of your nest egg when you 1st retire, based on taking out $10,000 a month on just over 3.5 million bucks. Question I have is will you reduce your monthly withdrawel once you collect Social Security?

Frankly anything over 3% scares me, especially if you start off with a down year or two. Congratulations on being in great shape, I'm just suggesting you be a little careful so you don't have to cut back after a year or two.Take a look at switching some of your IRA money into Roth IRA funds. I know you pay the taxes now but the way taxes are going up, you could come out ahead having tax free money after years of tax free growth. I did the max last year and I'm glad I did. Good Luck!

 

[LOL!]

Retirement Calculator - Parameter Form i-ORP is made for this calculation, but one should also confirm the nubmers by running hypothetical tax returns in TurboTax.

See also how to pay zero income taxes in retirment:
http://www.bogleheads.org/forum/viewtopic.php?t=87471

 

[txtig]

I'm not sure how I could take advantage of Roth conversions, at least until RMD's kick in, and then only to the extent that the RMD's exceed my then-current spending requirements. I expect to be in the 33% FIT bracket until I retire, so Roth conversions now don't seem to make sense to me.

To answer Jerome's question, the $10k/mo is what I'm forecasting I will spend. Actual withdrawal rate will have to be higher to account for taxes. I do plan to decrease withdraws by $36k/yr when I start drawing SS (at 66) and by another $18k/yr when DW starts her pension (65). That is what was really driving my original question: how do I minimize taxes over the long term; i.e., do I drain my taxable accounts first, or do I tap both IRA and taxable acounts simultaneously to try to stay in the 15% bracket for a longer period of time?

With regard to health care, I will have access to a Medicare supplement policy from my prior employer; $200/mo premium and $2500/yr/person stop-loss provision. So unless the company changes the plan, I don't have too many concerns over health care and my costs are already included in my $10k/mo spending forecast. I haven't researched Obamacare and any impacts it might have on me. I was assuming that since I have a private plan, I won't be affected. Is that a bad assumption?

Thanks in advance for your comments.

 

[Ed_The_Gypsy]

I suggest you take 2.5% out per year and give me 1%.

 

[Animorph]

I'm not sure how I could take advantage of Roth conversions, at least until RMD's kick in, and then only to the extent that the RMD's exceed my then-current spending requirements. I expect to be in the 33% FIT bracket until I retire, so Roth conversions now don't seem to make sense to me.

You probably don't want to Roth convert now. Wait until you retire. It looks like you might have a couple of years of low income before you start SS. Even after SS starts your tax bracket will probably be lower than after RMD's start. As long as that current marginal rate is equal to or less than your rate after RMD's start a Roth conversion may be helpful. Both in shifting money into a tax-free account and in reducing the amount of RMD's coming out a high tax brackets. It all depends on how your taxes look.

 

[Independent]

I’m thinking the best strategy would be to tap both IRA and taxable accounts such that the withdrawal from the IRA accounts is no more than the top of the 15% tax bracket (currently $72,500 for a joint return). This would stretch out the period where I’d be withdrawing from my taxable account and delay any exposure to the 25% bracket.

I'm pretty sure that it makes sense to "fill up the 15% bracket". After that, it gets muddier to me. Depends somewhat on the tax situation of your non-qualified assets (cap gains? interest bearing?)

 

[fh2000]

I'm pretty sure that it makes sense to "fill up the 15% bracket". After that, it gets muddier to me. Depends somewhat on the tax situation of your non-qualified assets (cap gains? interest bearing?)

My plan is also trying to fill up to 15% bracket and do as much Roth conversion as possible. If I begin at year 58 (DW will be 52), and by the year DW receives SS at 67, we will have 7-8 years to convert larger amount, and 6-7 years to convert smaller amounts.

Our goal is to try to reduce our tax deferred accounts down to less than $200,000 each, by the time we begin RWD.

According to RWD Distribution Table: IRA Required Minimum Distributions Table | Bankrate.com, the initial withdrawal will be $7,299. Adding it to SS, we will still be at 15% bracket.

 

[Rustward]

I'm not sure how I could take advantage of Roth conversions, at least until RMD's kick in, and then only to the extent that the RMD's exceed my then-current spending requirements.

I may have misinterpreted your statement, but it sounds as though you may be planning to convert the part of your RMD that is above your then-current spending requirement to a Roth. If I understand correctly, that is not allowed. Once you are taking RMDs, you must take the full RMD, and only distributions above the RMD are eligible for Roth conversion. You could, however, use the RMD money that is above your then-current spending requirement to pay the taxes on the amount converted to a Roth.