Q: When beginning to live off one’s investments, what is your preference (and why) among these to choices for drawing down assets: (1) Use taxable accounts first, letting IRA’s continue to grow; or (2) begin withdrawing some from IRA’s annually and use less of the taxable accounts to supplement the IRA distribution?
Basic background (trying to keep it simple to focus on the real issue): I’m considering giving up the day to day work grind and work on some areas of interest that may or may not produce income. Let’s assume no income is produced, so I’ll need to live off investments. Further, assume one has a significant amount in taxable accounts and a larger amount in IRA’s.
Scenario 1 Detail: First draw down the taxable accounts, leaving the IRA’s to grow tax deferred. As my taxable income would be low, I’d plan on converting (but not withdrawing) some traditional IRA balances to Roth IRA’s annually to take advantage of the low tax brackets. Eventually, when the taxed accounts are drawn down (but still leaving a nice sized “emergency” cash balance), begin to tap the IRA’s (Roth’s first, then traditional IRA’s).
Scenario 2 Detail: Begin in year 1 to take a distribution from the traditional IRA each year (using a 72T as I’m still in my 40’s) and take a much smaller amount from the taxable accounts to supplement my spending needs. Obviously the taxable account would last much longer with this scenario, but I’d start tapping the IRA’s earlier.
Do you see an advantage (or disadvantage) to one of the scenario’s?
Thanks for your thoughts.