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I'm reading through The Bogleheads' Guide to Retirement Planning, and it has a chapter on Withdrawal Strategies. This chapter recommends the following withdrawal strategy:
"After using Social Security, any pension or annuity payments, and RMDs from your traditional IRA for living expenses, the least taxing way to withdraw money is in the following order:
1. Taxable Accounts
2. Roth IRA
3. Tax Deferred accounts."
I'm surprised by this recommendation because my personal belief has been that I should withdraw from my Roth IRA last since it has the greatest tax advantage of both tax deferred growth and tax free withdrawals. I figured letting the Roth IRA grow as long as possible would provide the best return.
I've been wrong?
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Believe the stated order is simply the least taxing way to withdraw money. You would not have to pay any tax until you withdrew from the tax deferred account (unless there was some capital gains to pay by withdrawing from your taxable account).
To provide the best return there might be a different order.
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An argument can be made to use Roths last since they are not subject to RMDs at age 70.5.
Best Wishes, SpringMan
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I took from my taxable accounts first and now take distributions from a mix of IRAs and Roths to almost eliminate income taxes. Here is how I did that. Not everyone can do it my way, but perhaps some could work toward it.
I wanted to reduce income tax when I retired and to do that I needed to reduce taxable income and to do that I needed to reduce taxable accounts and other taxing income. By the end of the first 5 years in retirement, I had done that by selling off the taxable accounts to be used for current income needs and purchased I Bonds equivalent to 20% of my assets which gave an additional tax deferred investment. I Bond fixed interest is not as good today, but I would still consider them. Then a person could purchase $30,000 a year per person, but today you can't buy nearly that much... I would also consider municipal bonds. I also wanted to reduce my traditional IRA account balance so I converted about 20% of that balance during these first 5 years in retirement to Roth IRAs.....about 4% in each of those years. I paid the taxes then on that so that I don't have to pay taxes today.
So after those 5 years, I had about 55% in IRAs, 20% in I Bonds, 20% in Roth and less than 5% in taxable accounts. For income needs beyond Social Security I take from the traditional IRAs up to the point where taxes would be paid, then take from the Roths for the final income needs.
The result has been that for the last 8 years my income taxes have been in the 0 to $350 range each year and should continue that way. I could pay zero taxes each year by taking a little more Roth out and still maintain the Roth balance, but I don't mind paying that small amount. By the way, my Roth accounts have grown to where they are now 35% of my investments, so taxes should continue to be near zero.
“I fear the day technology will surpass our human interaction. The world will have a generation of idiots.” | ― Albert Einstein
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- Location: Indiana, retired 1998 at age 65
There are two overarching goals that I try to keep in mind when trying to decide how I will choose whether to withdraw from traditional IRA's or Roth IRA's.
First is to minimize my tax burden, not over my working years, not over my retirement, but rather over my lifetime. This is not easy to do, but may require some combination of withdrawals while keeping an eye on the marginal tax rate at the time.
The second goal is to have as much money as possible left in my Roth for my heirs; the Roth will offer them the largest advantage due to them being able to continue to defer taxes over their lifetimes.
It is not always easy to manage within this framework, especially when one considers mandatory withdrawals around age 70 and likely future tax changes, but still these are the factors I try to keep top of mind when trying to make the right decisions.
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It is very tempting to take some of those Roth distributions now. However, for us when I start SS the tax rates will really go up. That's when some Roth blending will be needed. Then when RMD's start, there will be a tax floor from SS + IRA distributions. More Roth income blending.
So right now we are taking most spending needs from IRA's to somewhat reduce those balances (reduced RMD's) before the SS tax bump comes along. A bit complicated to analyze as others have noted particularly with tax law uncertainty down the road.
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