Where best to withdraw funds from

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Topic Author
LMR1229
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Joined: Fri Oct 10, 2014 1:27 pm

Where best to withdraw funds from

Post by LMR1229 »

Hello, all, and thank you in advance for your advice.

My question is where is it better to withdraw funds from for living expenses in my circumstance, a taxable account or a tax-advantaged account.

I am retired and receive a NY state pension. My pension puts me in the 15% tax group. My AA between all accounts is pretty much a 60/40 stock/bond ratio. I sold my house and put all proceeds into VTI in a TD Ameritrade account. This account amounts to 40% of my total portfolio. I still have my 457b account with NYS. In this tax-advantaged account, I hold Vanguard Total Bond Index, VPMAX, an international fund that is for NYS employees/retirees only, and a stable income fund. The stock funds in the 457b make up the other 20% for my equity holdings, and Total Bond and stable income make up the 40% fixed income portion.

Being that all proceeds from the sale of my house are tax exempt, if/when I withdraw funds from the TD Ameritrade account I only pay taxes on any capital gains. It seems like "free" money. If/when I withdraw money from my 457b plan, those funds will be taxed and may put me in a higher tax bracket when combined with my pension, depending on how much I withdraw.

So am I better off letting the account holding VTI to grow and withdrawing necessary funds from the 457b plan? Or am I better off withdrawing funds when necessary from VTI tax-free, other than capital gains, and leaving the 457b plan to grow? Or maybe a combination of withdrawing from both?

Thank you for opinions.

LMR1229
synergy
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Re: Where best to withdraw funds from

Post by synergy »

I am also trying to figure out the best way for me to withdraw funds in retirement. My two major considerations are current tax consequences and the tax consequences for my kids after spouse and I pass. Leaving them with all tax advantaged accounts will cost them a bunch. So I am trying to share the tax burden- some for me and some for them. I am still looking at different scenarios but the choices on a yearly basis are dizzying.
LeeMKE
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Re: Where best to withdraw funds from

Post by LeeMKE »

Here's one way to do it:

Figure out how much you need available for expenses
What is the tax rate on that amount if you took it all from taxable sources? Where is the next tax bracket break?
If the tax bracket break is far enough away to make it worthwhile, take an amount sufficient to lower your taxable income to that level, from the tax-free account. Take the rest from your tax deferred accounts and pay the taxes.

In your case, you can probably use the top of the 15% tax bracket as your breaking point. In the space between your pension (and social security when that kicks in) and the top of the 15% bracket, take from the tax deferred account, paying the 15% taxes. If you need more, take it from the tax-free account so you don't pay the higher taxes on that amount.

Does that make sense? Does this work in your situation? Not knowing your income needs is the part of the equation missing here, so I'm guessing a bit.
The mightiest Oak is just a nut who stayed the course.
Topic Author
LMR1229
Posts: 74
Joined: Fri Oct 10, 2014 1:27 pm

Re: Where best to withdraw funds from

Post by LMR1229 »

LeeMKE, thanks for your reply.

My pension brings me right up to the top of the 15% tax bracket, married filing jointly. To cover all my expenses, I do need to withdraw funds from either account, but this amount varies month to month, depending on the charge card, lol, which I pay off in full each month.

Does this information help in your answering which account to withdraw from?
JW-Retired
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Re: Where best to withdraw funds from

Post by JW-Retired »

How old are you? i.e., it might help us to know how close you are to being forced to take RMDs from the 457b. Also, how large is the 457. Is the RMD going to bump you into a still higher tax bracket?
JW
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Topic Author
LMR1229
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Re: Where best to withdraw funds from

Post by LMR1229 »

I am 58 years old and the 457b account is mid six figures. I don't have to worry about taking RMDs for a while.

If I take money out of the 457b account it is going to bump me up into the next tax bracket, being that I'm at the top of the 15% bracket from receiving my pension, and withdrawals from the 457b are considered income and are taxable. Funds taken out of the TD Ameritrade account are not considered income but are subject to capital gains.
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Toons
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Re: Where best to withdraw funds from

Post by Toons »

"Funds taken out of the TD Ameritrade account are not considered income but are subject to capital gains."

Are you selling shares or are you talking about the quarterly dividends that are paid. :happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee
Topic Author
LMR1229
Posts: 74
Joined: Fri Oct 10, 2014 1:27 pm

Re: Where best to withdraw funds from

Post by LMR1229 »

Hello, Toons.

I'm talking about shares that are being sold. I know that quarterly dividends are taxable, and any profit from shares being sold is taxable as capital gains.
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Toons
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Re: Where best to withdraw funds from

Post by Toons »

LMR1229 wrote:Hello, Toons.

I'm talking about shares that are being sold. I know that quarterly dividends are taxable, and any profit from shares being sold is taxable as capital gains.

:thumbsup
Ok,,,So you are taking the quarterly dividends in cash and Not reinvesting,,good idea to supplement income
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee
JW-Retired
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Re: Where best to withdraw funds from

Post by JW-Retired »

LMR1229 wrote:I am 58 years old and the 457b account is mid six figures. I don't have to worry about taking RMDs for a while.

If I take money out of the 457b account it is going to bump me up into the next tax bracket, being that I'm at the top of the 15% bracket from receiving my pension, and withdrawals from the 457b are considered income and are taxable. Funds taken out of the TD Ameritrade account are not considered income but are subject to capital gains.
Mid six figures could/should grow to over a million by the time of RMDs. If you are single, the top of 15% bracket is about $38k taxable income. Adding a $40k RMD to that more than doubles your taxable income but still leaves you in the 25% bracket. So it's basically pay 25% tax on your 457 withdrawals now and will pay at the same 25% rate later. So it doesn't really matter.

If your situation is different you can adjust this estimate. One thing that might change it is if you will get SS in addition to your NY pension. This might boost you into a higher bracket at age 70+. That might be a reason to take money from the 457 now so RMDs won't be too large.
JW
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Topic Author
LMR1229
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Re: Where best to withdraw funds from

Post by LMR1229 »

Toons: Correct.

So do you have an opinion on which account I should take funds out of to cover expenses? Let VTI grow untouched and take taxable funds out of the 457b? Or leave the 457b alone and take funds out of VTI, thereby decreasing my "free" tax-exempt funds.
Topic Author
LMR1229
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Re: Where best to withdraw funds from

Post by LMR1229 »

JW: I'm married filing jointly. The top of 15% for married filing jointly is approx $74,000. And, yes, I will get SS in addition to my pension.

Thanks for your reply.
JW-Retired
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Re: Where best to withdraw funds from

Post by JW-Retired »

LMR1229 wrote:JW: I'm married filing jointly. The top of 15% for married filing jointly is approx $74,000. And, yes, I will get SS in addition to my pension.
OK, so I think that means you are headed for the 28% bracket when RMDs kick in. If you have a taxable income of $74k on just the pension, guessing that means it's a gross of around $95K. So estimating age 70 gross incomes = $95k pension, $50k SS, + $40k RMD = $185k. Unless you have a ton of itemized deductions that is in the 28% bracket. SS income might be still higher if your wife has a SS work record that gives her greater SS than spousal. I'm doing lots of guessing but you can probably estimate things pretty closely.

The other thing is SS income has weird nasty effects on the taxation of "other income". The SS component is taxed less, but to make up for that the other income component (i.e., RMDs) is taxed more. This gets phased in over an medium sort of income range and by the 28% bracket it stabilizes with 85% of SS being taxable. This still leaves SS income much advantaged compared to RMDs. The maximum Federal tax on SS will be at 85% of your nominal marginal rate and many/most states don't tax it at all. My own CA is one of those states and we happily took advantage of this by delaying our SS as long as possible. http://www.bogleheads.org/wiki/Taxation ... y_benefits

I recommend using TaxCaster (online and free) to get a handle on what your taxes might be once you are 70. You can determine what combo of income streams would be most favorable and adjust what you are doing now to steer toward that. (e.g., spend some 457 assets to enable delaying your SS.) TaxCaster is very simple to use. https://turbotax.intuit.com/tax-tools/c ... taxcaster/
JW
ps: NY also doesn't tax social security.
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Cyclesafe
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Re: Where best to withdraw funds from

Post by Cyclesafe »

I'm sure you are aware of this, but under current law incurring higher taxable income (whether from qualified dividends, capital gains, or non-qualified income), beyond (2014 MFJ) $73,800, will cause a 15% tax on qualified dividends previously taxed at 0% and tax on the higher taxable income at 15 or 25% depending.....

One should view one's marginal tax rate in this situation as 30 or 40% depending....

One needs to prioritize objectives here because they are mutually exclusive. What's best for you is not best for your heirs and vice-versa. Do them and yourself a favor of thinking of yourself first and leave for them the good problem to have of having to pay taxes on a windfall that has hopefully has been diminished by thoughtful periodic withdrawals as you and your wife enjoy your many remaining years life to the extent possible.

Fill up the 15% bracket with capital gains. When social security kicks in and you are pushed higher, decide then whether to live larger (gifting to your heirs in life; paying their medical bills or education etc., or convert to a Roth IRA for a tax-free legacy) and draw down first taxable, then deferred to the top of the 25% bracket. Let deferred grow tax free as long as possible.

At that point you still get all of your deductions and exemptions, no AMT, no ACA NIIT. And consider state taxes too.

Run a couple of scenarios with TurboTax, especially in the years after 70 1/2 so you can see where RMD's put you. If the RMD's put you in the 28% bracket, the parade of horribles above come into play; it may behoove you then to pull from deferred (from when social security puts you into the 25% bracket forevermore), rather than taxable, to top you off at 25% ($148,850 MFJ in 2014). If the RMD's then still keep you within the 25% bracket, you're OK with also pulling from taxable.
"Plans are useless; planning is indispensable.” (Dwight Eisenhower) | "Man plans, God laughs" (Yiddish proverb)
Topic Author
LMR1229
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Joined: Fri Oct 10, 2014 1:27 pm

Re: Where best to withdraw funds from

Post by LMR1229 »

JW, Cyclesafe, thanks for your replies.

Sorry, I should have been clearer re: my pension. The 75k is gross, I net approx 64k after taxes. Also, as of now, I definitely plan on taking SS at 62, which will be approx 23k per year. My wife's SS will be minimal, as she's been a homemaker most of the time. She's also a couple of years younger than me.

Also, as far as RMD's on my 457b plan at 70 1/2, keep in mind although it's a mid six figure amount and can grow tax-free, most of this account amounts to 40% of the fixed income portion of my total portfolio, so it won't grow to such a large amount as it is bonds and cash. That's why I'm asking is it better to withdraw funds from the "safe" portion of my total portfolio when needed for expenses, which would also be considered income, or withdraw from the tax-free (other than capital gains) "aggressive" portion of my total portfolio, thereby reducing the equity portion that hopefully will continue to grow at a greater rate if left untouched.

I'll look at the websites and links that you've sent me, and I thank you both for those.
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Cyclesafe
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Re: Where best to withdraw funds from

Post by Cyclesafe »

LMR1229 wrote:That's why I'm asking is it better to withdraw funds from the "safe" portion of my total portfolio when needed for expenses, which would also be considered income, or withdraw from the tax-free (other than capital gains) "aggressive" portion of my total portfolio, thereby reducing the equity portion that hopefully will continue to grow at a greater rate if left untouched.
Your first consideration should be to reallocate to maintain your desired equity / fixed income allocation. The second (and separate) consideration is whether the assets in each of taxable and deferred are in the most (relatively) tax efficient space. See the Wiki on tax efficiency. https://www.bogleheads.org/wiki/Princip ... _placement
Last edited by Cyclesafe on Mon Feb 09, 2015 3:09 pm, edited 1 time in total.
"Plans are useless; planning is indispensable.” (Dwight Eisenhower) | "Man plans, God laughs" (Yiddish proverb)
kolea
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Re: Where best to withdraw funds from

Post by kolea »

I asked a similar question here about withdrawing from taxable accounts vs. withdrawing from tax-advantaged accounts, and based on what I read we have been withdrawing from taxable at this point and letting our IRA's grow. I am not sure it really matters in the long run as the IRS will get its share of the IRA money at some point, either now or later. But at least for a few years (until we reach 70) we will be able to minimize taxes at our marginal rate and maximize tax at the LTCG rate, which for us is a win.
Kolea (pron. ko-lay-uh). Golden plover.
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