Asset drawdown in "Retirement"

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Asset drawdown in "Retirement"

Postby pobox2001 » Fri Dec 21, 2012 5:48 pm

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.

pobox2001
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Re: Asset drawdown in "Retirement"

Postby Taylor Larimore » Fri Dec 21, 2012 5:58 pm

pobox:

In general, it is best to withdraw from taxable accounts first. This article explains:

http://www.extension.org/pages/27765/ma ... retirement]Making Money Last in Retirement[/url]

Best wishes
Taylor
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Re: Asset drawdown in "Retirement"

Postby VictoriaF » Fri Dec 21, 2012 6:07 pm

You can do a mix of Scenarios 1 and 2:
a) draw down you taxable accounts
b) start 72T

The advantage is that you would not be depleting your Roth.

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Re: Asset drawdown in "Retirement"

Postby livesoft » Fri Dec 21, 2012 6:15 pm

I would draw from multiple accounts and make conversions to Roth IRA that would produce the lowest possible taxes overall and over time. I would use something like www.i-orp.com along with personal analysis (including something like TurboTax) to figure this out.

I am not sure where the myth comes from that one must withdraw from some account "first". Sure, it may turn out that one should withdraw from one account only first, but that is not always guaranteed.
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Re: Asset drawdown in "Retirement"

Postby Sidney » Fri Dec 21, 2012 6:28 pm

livesoft wrote:I am not sure where the myth comes from that one must withdraw from some account "first". Sure, it may turn out that one should withdraw from one account only first, but that is not always guaranteed.

It is a corollary to the "not spending principal" myth.
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Re: Asset drawdown in "Retirement"

Postby midareff » Fri Dec 21, 2012 6:56 pm

pobox2001 wrote: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?

IRA accounts (not ROTH) will produce fully taxable income while taxable accounts will not be fully taxable depending on lots sold, capital gains exposure, etc. Distributions of dividends and capital gains from funds are already taxable so it makes sense to retain them for expenses.

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).
Seems to make sense to me.

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.

I see a tax penalty in scenario 2. Your taxable accounts throw dividends which are already taxable so they should be used for expenses as the tax has to be paid. Drawing down IRA accounts early to pay tax before it may be required, as opposed to letting them continue to grow tax free, is not an ideal method of conserving assets. Minimizing your tax burden profile in retirement is very important.
Do you see an advantage (or disadvantage) to one of the scenario’s?

Thanks for your thoughts.

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Re: Asset drawdown in "Retirement"

Postby Puakinekine » Fri Dec 21, 2012 7:03 pm

In the real world there is sometimes no choice. At age 70.5 you have to start taking your RMD from your IRA. So far, our RMD, combined with Social Security and a bit of consulting has given us more then enough to live on.
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Re: Asset drawdown in "Retirement"

Postby Peter Foley » Fri Dec 21, 2012 9:57 pm

You don't give any indication as to age, total assets, SS eligibility and the probability of RMDs. Based in the information you did present, go with Option one but withdraw from the TIRA before the Roth to the extent you can make withdrawals while in a low tax bracket. Once you get to SS you will want to have Roth money available for withdrawals to keep you taxes on your SS low. Try to map out a plan at a set income level for 5-10 years with the goal being to keep taxes as low as possible throughout that period.

By the way, there is software that models order of withdrawals. My broker (Schwab) has it free for clients- I'm not sure if there are sources available to the general public for free or not.
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Re: Asset drawdown in "Retirement"

Postby Taylor Larimore » Fri Dec 21, 2012 10:35 pm

Bogleheads:

I will expand on Peter's excellent post to suggest that if you are in a period of zero or low income-tax bracket (often after retirement but before receiving Social Security, pension, or RMD), this period may offer an opportunity to withdraw from or convert a Traditional IRA without any tax due.

Best wishes
Taylor
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Re: Asset drawdown in "Retirement"

Postby Padlin » Sat Dec 22, 2012 7:53 am

Peter Foley wrote:By the way, there is software that models order of withdrawals. My broker (Schwab) has it free for clients- I'm not sure if there are sources available to the general public for free or not.


The only one I've run into is I-ORP that Livesoft mentioned above.
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