Withdrawal order in retirement

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Withdrawal order in retirement

Postby tms » Tue Jan 12, 2010 6:22 pm

Does anyone have any thoughts on whether a retiree should withdraw from a Qualified or Non-qualified plan first?

I think the best way is probably to tap the Non-Qualified funds first and defer the tax on the qualified plans as long as possible. However, I am not necessarily comfortable with a retiree getting to the point where they have only Qualified accounts and therefore very little in the way of tax diversification.
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Postby chaz » Tue Jan 12, 2010 7:05 pm

Would you lose tax diversification since you can rebalance?
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Postby seugene » Tue Jan 12, 2010 7:07 pm

Complex considerations are involved with many moving parts. Check this out: http://www.twenty-first.com/pdf/Horan-Withdraw_Loc.pdf

Edit: fixed the link
Last edited by seugene on Wed Jan 13, 2010 5:38 am, edited 1 time in total.
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Postby rick51 » Tue Jan 12, 2010 7:16 pm

I get an error message on the suggested link?
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Postby petrico » Tue Jan 12, 2010 7:35 pm

seugene wrote:Complex considerations are involved with many moving parts. Check this out: http://www.twenty-first.com/pdf/Horan-Withdraw_Loc.pdf.

This paper is along the lines of what I would have added: the idea of taking advantage of (or fully utilizing) the lowest/lower marginal tax brackets, if possible, by making withdrawals from tax-deferred accounts. To varying degrees people in retirement may be able to exercise a great deal of control over the taxes they pay. From the conclusion of the paper:

Because distributions from traditional IRAs are taxable and those from Roth IRAs are not, making withdrawals from traditional IRAs is advantageous when the tax burden is light and making withdrawals from Roth IRAs is advantageous when the tax burden would otherwise be heavy. When taxable distributions can be applied against personal exemptions and deductions or against tax brackets with relatively low tax rates, a naive strategy of withdrawing from the traditional IRA first was found to perform substantially better than the naive strategy of withdrawing from the Roth IRA first. However, an informed strategy of taking traditional IRA distributions up to the top of a “low” tax bracket and satisfying the remainder of the withdrawal requirement from the Roth IRA yields residual accumulations that are substantially greater than the better naive strategy.

Thanks for the paper -- looks interesting.

--Pete

PS: The "." at the end of the link is extraneous. Try this: http://www.twenty-first.com/pdf/Horan-Withdraw_Loc.pdf
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Postby ObliviousInvestor » Tue Jan 12, 2010 7:37 pm

Here's a guest post I wrote at Five Cent Nickel that provides a brief introduction to some strategies that can reduce your overall tax burden:

http://www.fivecentnickel.com/2009/10/1 ... trategies/
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Postby livesoft » Tue Jan 12, 2010 7:40 pm

Doesn't the online calculator at www.i-orp.com help with all this?
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Postby retcaveman » Tue Jan 12, 2010 9:21 pm

This link will take you to a list of Jonathan Clements articles. At the bottom of the list, you will see a title, "Which Funds to Tap First in Retirement." It's a good one worth reading.

http://glenjgrossman.com/jonathan_clements.htm
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Postby Peter Foley » Tue Jan 12, 2010 9:57 pm

I've researched this quite a bit. First, here are some links:

From Bob:

Bogleheads Thread: http://www.bogleheads.org/foru....hp?t=40339
Dale Maley's Website: http://dalemaley.webs.com/misc.htm
Bogleheads Thread: http://www.bogleheads.org/foru....hp?t=33613
Richard's spreadsheet: http://public.sheet.zoho.com/p....ps-wdraw-2
Bogleheads Thread: http://www.bogleheads.org/foru....hp?t=32199

So I (Bob, not me) decided to delve into this subject and build my own spreadsheet:

http://bobsfiles.home.att.net/...._Taxes.zip

In my analysis, I (Peter) constructed a number of different scenarios based on current tax rates and expected future tax rates. It is a few pages in length so I'll just copy the introduction and the first scenario here. If you want the whole thing I can PM it to you.

Tax Efficient Withdrawal Strategies/Scenarios
The rule of thumb for withdrawal strategies is that if one has both taxable and tax deferred accounts, it is better to withdraw from the taxable accounts first and let tax deferred accounts (and Roth IRAs) continue to grow. The two general exceptions to this rule is when the retiree is required to take a minimum distribution, and whenever the retiree is in an unusually low tax bracket. A 2006 TIAA-CREF institute paper by William Reichenstein , Tax-Efficient Sequencing of Accounts to Tap in Retirement shows that applying these principles can increase account longevity by 2.5 to 3.0 years. (This is on the Wiki.)
The case analysis assumes a 25% ordinary tax rate and a 15% capital gains rate for a married couple receiving social security.
Tax Efficient Withdrawal Strategies/Scenarios flow chart is a guide, not an absolute. Its purpose is to pick up where Reichenstein left off.
Possible Tax Efficient Withdrawal Strategies: 6 profiles. A sample profile:
A. Profile:
• High income/taxes now - High income later
• You are retired but not yet drawing social security.
• You have more money in your taxable accounts than in your tax deferred accounts. You are in a relatively high bracket and will continue to be in a relatively high tax bracket when you begin social security withdrawals.
Primary withdrawal strategies:
• Withdraw funds as needed for living expenses from your taxable account. Unless you 1) can control your annual income and are able to lower it (no defined pension for example) 2) have a very high tax bracket when you start your RMDs and/or 3) you wish to leave substantial assets to your heirs, it is likely not to be to your advantage to convert tax deferred funds to a Roth.
• Once you start receiving social security, follow scenario D or E, whichever is appropriate.
• Exception: If you have more funds than you will need in your lifetime, withdraw from your tax deferred funds first to allow your heirs to receive your taxable funds on a stepped up basis.
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Postby Federal Agent » Sat Feb 13, 2010 12:55 pm

Peter Foley wrote: A 2006 TIAA-CREF institute paper by William Reichenstein , Tax-Efficient Sequencing of Accounts to Tap in Retirement shows that applying these principles can increase account longevity by 2.5 to 3.0 years. (This is on the Wiki.)
The case analysis assumes a 25% ordinary tax rate and a 15% capital gains rate for a married couple receiving social security.
Tax Efficient Withdrawal Strategies/Scenarios flow chart is a guide, not an absolute. Its purpose is to pick up where Reichenstein left off.
Possible Tax Efficient Withdrawal Strategies: 6 profiles. A sample profile:
A. Profile:
• High income/taxes now - High income later
• You are retired but not yet drawing social security.
• You have more money in your taxable accounts than in your tax deferred accounts. You are in a relatively high bracket and will continue to be in a relatively high tax bracket when you begin social security withdrawals.
Primary withdrawal strategies:
• Withdraw funds as needed for living expenses from your taxable account. Unless you 1) can control your annual income and are able to lower it (no defined pension for example) 2) have a very high tax bracket when you start your RMDs and/or 3) you wish to leave substantial assets to your heirs, it is likely not to be to your advantage to convert tax deferred funds to a Roth.
• Once you start receiving social security, follow scenario D or E, whichever is appropriate.
• Exception: If you have more funds than you will need in your lifetime, withdraw from your tax deferred funds first to allow your heirs to receive your taxable funds on a stepped up basis.


I am having no luck finding this on the Wiki? Can anyone tell me how it can be found?
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Postby OAG » Sat Feb 13, 2010 2:06 pm

This may help - the book can be read (on-line): http://books.google.com/books?id=cul7Tm ... q=&f=false
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Postby Federal Agent » Mon Feb 15, 2010 8:25 pm

OAG wrote:This may help - the book can be read (on-line): http://books.google.com/books?id=cul7Tm ... q=&f=false


Thanks OAG! That book is available online.

Can someone tell me how to find the info on the Wiki? (see my post above)
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Postby williamg » Fri Jun 11, 2010 3:20 pm

We did significant (for us) Roth conversions this and last year funded largely by inheritance money. Had tentatively planned that Roths would be there as last resort monies. Am now thinking of at least taking dividends from Roths each year beginning this year. Can see an end run coming on Roth tax advantages. See link below. Graetz has an article in this month's AARP.

http://www.washingtonpost.com/wp-dyn/co ... 602909.htm

"In his 2008 book, "100 Million Unnecessary Returns," Yale law professor Michael J. Graetz estimates that a VAT of 10 to 14 percent would raise enough money to exempt families earning less than $100,000 -- about 90 percent of households -- from the income tax and would lower rates for everyone else."
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