Spend IRA First?

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SteveNet
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Spend IRA First?

Post by SteveNet » Sun Dec 01, 2013 7:05 pm

I've been researching withdrawal draw down procedures for the past week or so and something I ran across this week but can't find again (It may have been in this forum) was the possibility of taking distributions from an IRA first rather than from a Taxable account.

Having a Taxable account, a IRA and a Roth account.
And being in the 15% tax bracket long term Capital Gains are taxed at 0%, making it essentially a Roth Tax wise. Given current tax laws of course.
I have the need to draw down to supplement my pension while I wait to take SS at age 70 and wanting to convert my IRA to a Roth
over the next ten years...why not just take funds from the IRA (as I have to pay the tax to convert anyway) and leave the taxable account to grow?

Is this a potential good method? It kind of flies in the face of what I thought common practice of taxable draw down first.
Age 60 this March 2014 so IRA distributions are penalty free.

If there is discussion already on this issue I apologize (I tried to find it) and please direct me to it.

Thanks,
SteveNet
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livesoft
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Re: Spend IRA First?

Post by livesoft » Sun Dec 01, 2013 7:08 pm

What happens when the taxable account becomes so large that the annual dividends it creates bump you out of the 15% bracket?

When you convert from IRA to Roth IRA, you will need to pay taxes on those conversions won't you? In order to keep the most money into the Roth, one should pay the taxes from the taxable account, right?
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SteveNet
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Re: Spend IRA First?

Post by SteveNet » Sun Dec 01, 2013 7:41 pm

livesoft wrote:What happens when the taxable account becomes so large that the annual dividends it creates bump you out of the 15% bracket?

When you convert from IRA to Roth IRA, you will need to pay taxes on those conversions won't you? In order to keep the most money into the Roth, one should pay the taxes from the taxable account, right?
Hi livesoft and thanks for replying.

I guess it's a matter of having certain levels of dividends.

Currently my taxable acct only puts out aprox 6k of qualified dividends VTI. Which is not an issue for me.

I guess I should expand a bit on my situation.

Currently in the 15% bracket, after deductions my taxable income is aprox 16K
married filing jointly top level for 15% tax bracket is aprox 72K
Which leaves aprox 56k of unused taxable income in the 15% bracket.
If I need 25k to 30k from the IRA that still leaves me with 26K of headroom in the 15% tax bracket.
I am thinking of each year selling that portion of the taxable account and immediately repurchasing the same investment to 'clear' the long term Capital gain.
I currently have 52k in long term cap gain in taxable, so I would be able to clear half of that next year.

Edit...

"When you convert from IRA to Roth IRA, you will need to pay taxes on those conversions won't you?" Yes

"In order to keep the most money into the Roth, one should pay the taxes from the taxable account, right?" Yes

But what I am thinking is that I have to pay the taxes on the IRA distribution anyway, whether it goes into the Roth or gets spent.
I might as well take the taxes out of the IRA distribution, if it's to be used as income that year.

I figure that at the current level of my taxable acct 300K ish yielding 6K in qualified dividends it would have to grow to 2,800,000 to give out dividends of 56K which would bump me out of the 15% bracket.
Somehow I don't think that likely.
Last edited by SteveNet on Sun Dec 01, 2013 7:55 pm, edited 1 time in total.
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livesoft
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Re: Spend IRA First?

Post by livesoft » Sun Dec 01, 2013 7:53 pm

If you use the IRA to pay taxes, then that's less money that will be able go into a Roth IRA for the future.
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SteveNet
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Re: Spend IRA First?

Post by SteveNet » Sun Dec 01, 2013 7:58 pm

livesoft wrote:If you use the IRA to pay taxes, then that's less money that will be able go into a Roth IRA for the future.
Thats kind of what i'm trying to get at.

If I spend down the IRA first instead of the Taxable acct... in my tax bracket the Taxable account is tax free like a Roth acct. Given I stay in the 15% tax bracket.
I then have no RMD at 70 or have the possibility of extra SS taxes due to RMD's.
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livesoft
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Re: Spend IRA First?

Post by livesoft » Sun Dec 01, 2013 8:13 pm

Roth IRAs do not have RMDs unless they are inherited.
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SteveNet
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Re: Spend IRA First?

Post by SteveNet » Sun Dec 01, 2013 8:22 pm

livesoft wrote:Roth IRAs do not have RMDs unless they are inherited.
True, but I was referring to drawing down the Traditional IRA completely prior to age 70.
I know you are referring to converting the IRA to Roth hence no RMD's in that case.

My point is I have to pay the taxes on the IRA as income tax in either case.
Why use up my Taxable to pay the taxes for conversion and pay for yearly expenses 'if' the taxable acts as a Roth in my case?
Wouldn't it be more prudent to save the Roth like Taxable acct?
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Re: Spend IRA First?

Post by livesoft » Sun Dec 01, 2013 8:31 pm

If LT cap gains tax rates change in the future, you may have issues. If you have would-be heirs who are not in the 0% LT Cap gains tax bracket, they will have to pay taxes when they would not have if they inherited a Roth.

I think it is less likely that the tax-free withdrawals from a Roth will be changed than LT cap gains tax rates changed.

Have you tried to model your withdrawals and taxes with www.i-orp.com backed up by TurboTax?

I'm just trying to think of all possible angles.
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Re: Spend IRA First?

Post by furwut » Sun Dec 01, 2013 8:55 pm

SteveNet wrote:I've been researching withdrawal draw down procedures for the past week or so and something I ran across this week but can't find again (It may have been in this forum) was the possibility of taking distributions from an IRA first rather than from a Taxable account.
Will you be buying health insurance from the new exchange? The Finance Buff had a recent article proposing that early retirees preserve their taxable account so as to strategically lower their taxable income once they near 65. Doing so would allow them to qualify for the cost sharing silver health plans when they are presumably requiring more health care.

Also - are we approaching a point where the conventional wisdom of converting TIRA to Roth is becoming less appealing?

In the past one might have do so:
1. to fill out a favorable tax bracket prior to receiving a pension or social security. But now such a person might have more to gain by keeping their taxable income low to maximize a health care subsidy.

2. To eliminate or reduced taxation of social security. But isn't the threshold amount where social security benefits start to become taxed not indexed to inflation so that each year it is effectively is being lowered?

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Re: Spend IRA First?

Post by Peter Foley » Sun Dec 01, 2013 9:55 pm

SteveNet wrote:
... in my tax bracket the Taxable account is tax free like a Roth acct. Given I stay in the 15% tax bracket.
This is true and provides you with an opportunity to "tax gain harvest". As long as you stay within the 15% bracket, you can sell taxable account holdings with long term capital gains and reinvest in them immediately. By doing so you increase your cost basis. If you have some big gains in taxable, this could be part of what you try to accomplish during the period before you start taking SS. I laid out a 5 year plan for my wife and myself when we retired. I identified from where we wanted to access assets for annual income while allowing for Roth conversions and avoiding long term capital gains. One can live comfortably on less that $72,500 in taxable income.

If you think you will be in a higher tax bracket at age 70 or 70 1/2, it may make sense to withdraw from and IRA now, or convert some of it to a Roth. At 70 1/2 it is most likely that your SS will be highly taxed if you have significant IRA assets.

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SteveNet
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Re: Spend IRA First?

Post by SteveNet » Sun Dec 01, 2013 11:19 pm

furwut wrote:
SteveNet wrote:I've been researching withdrawal draw down procedures for the past week or so and something I ran across this week but can't find again (It may have been in this forum) was the possibility of taking distributions from an IRA first rather than from a Taxable account.
Will you be buying health insurance from the new exchange? The Finance Buff had a recent article proposing that early retirees preserve their taxable account so as to strategically lower their taxable income once they near 65. Doing so would allow them to qualify for the cost sharing silver health plans when they are presumably requiring more health care.

Also - are we approaching a point where the conventional wisdom of converting TIRA to Roth is becoming less appealing?

In the past one might have do so:
1. to fill out a favorable tax bracket prior to receiving a pension or social security. But now such a person might have more to gain by keeping their taxable income low to maximize a health care subsidy.

2. To eliminate or reduced taxation of social security. But isn't the threshold amount where social security benefits start to become taxed not indexed to inflation so that each year it is effectively is being lowered?
No, I have a health ins plan through a trust so a health care exchange isn't a part of my planning.

2. "But isn't the threshold amount where social security benefits start to become taxed not indexed to inflation so that each year it is effectively is being lowered?"
I seem to remember it isn't, however I could be wrong, I'll have to check into that.

EDIT.. I found a reference to it not being indexed to inflation here...
http://www.urban.org/retirement_policy/ssincometax.cfm

"married couples (who file taxes jointly) with income over $44,000 may need to pay tax on up to 85 percent of benefits.
The income thresholds for determining the taxable fraction of benefits are not indexed for inflation, so a growing share of beneficiaries pays personal income taxes on their benefits each year"

This is one of the reasons that I was interested in spending down the IRA due to RMD's at age 70 especially if I wait till age 70 to collect SS, as the amount would be higher and result in more of SS being taxed.

For us SS projections at age 70 with 3.5% inflation rate would be aprox 57K divided by 2 would be aprox 28K my pension would be 18k which puts me over the 44K level having to pay up to 85% tax on SS benefits, and that is without any dividends or taxable payments from investment accounts.
Last edited by SteveNet on Sun Dec 01, 2013 11:53 pm, edited 1 time in total.
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SteveNet
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Re: Spend IRA First?

Post by SteveNet » Sun Dec 01, 2013 11:22 pm

Peter Foley wrote:SteveNet wrote:
... in my tax bracket the Taxable account is tax free like a Roth acct. Given I stay in the 15% tax bracket.
This is true and provides you with an opportunity to "tax gain harvest". As long as you stay within the 15% bracket, you can sell taxable account holdings with long term capital gains and reinvest in them immediately. By doing so you increase your cost basis. If you have some big gains in taxable, this could be part of what you try to accomplish during the period before you start taking SS. I laid out a 5 year plan for my wife and myself when we retired. I identified from where we wanted to access assets for annual income while allowing for Roth conversions and avoiding long term capital gains. One can live comfortably on less that $72,500 in taxable income.

If you think you will be in a higher tax bracket at age 70 or 70 1/2, it may make sense to withdraw from and IRA now, or convert some of it to a Roth. At 70 1/2 it is most likely that your SS will be highly taxed if you have significant IRA assets.
This is precisely what I was thinking, I have used "tax gain harvest" in the past to do just this.
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SteveNet
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Re: Spend IRA First?

Post by SteveNet » Sun Dec 01, 2013 11:28 pm

livesoft wrote:If LT cap gains tax rates change in the future, you may have issues. If you have would-be heirs who are not in the 0% LT Cap gains tax bracket, they will have to pay taxes when they would not have if they inherited a Roth.

I think it is less likely that the tax-free withdrawals from a Roth will be changed than LT cap gains tax rates changed.

Have you tried to model your withdrawals and taxes with http://www.i-orp.com backed up by TurboTax?

I'm just trying to think of all possible angles.
I have run so many different outlooks with orp my head spins just looking at the program. However I don't know that the turbo tax connection is.

I do appreciate the comments and insight, I'm not committed to what I suggested, just trying to see if it is a feasible alternative for me given I'm in a low tax bracket.

I'll have to get into this more tomorrow though :sharebeer
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Watty
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Re: Spend IRA First?

Post by Watty » Sun Dec 01, 2013 11:49 pm

One thing that I have not seen mentioned is that spending down the IRA first before you start Social security may give you less taxable income when your retire which could make less of your social security taxable once you start receiving it.

http://www.bogleheads.org/wiki/Taxation ... y_benefits

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SteveNet
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Re: Spend IRA First?

Post by SteveNet » Sun Dec 01, 2013 11:56 pm

Watty wrote:One thing that I have not seen mentioned is that spending down the IRA first before you start Social security may give you less taxable income when your retire which could make less of your social security taxable once you start receiving it.

http://www.bogleheads.org/wiki/Taxation ... y_benefits
Ah I just posted that sort of about 3 posts above...as an edit so it may have been edited after you read it.

EDIT.. I found a reference to it not being indexed to inflation here...
http://www.urban.org/retirement_policy/ssincometax.cfm

"married couples (who file taxes jointly) with income over $44,000 may need to pay tax on up to 85 percent of benefits.
The income thresholds for determining the taxable fraction of benefits are not indexed for inflation, so a growing share of beneficiaries pays personal income taxes on their benefits each year"

This is one of the reasons that I was interested in spending down the IRA due to RMD's at age 70 especially if I wait till age 70 to collect SS, as the amount would be higher and result in more of SS being taxed.

For us SS projections at age 70 with 3.5% inflation rate would be aprox 57K divided by 2 would be aprox 28K my pension would be 18k which puts me over the 44K level having to pay up to 85% tax on SS benefits, and that is without any dividends or taxable payments from investment accounts.
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Epsilon Delta
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Re: Spend IRA First?

Post by Epsilon Delta » Mon Dec 02, 2013 10:12 am

I think you need to examine your goals.

If your aim is to leave an inheritance to your rich (high tax bracket) doctor daughter getting money in a Roth may be a priority. If you goal is to leave an inheritance to your starving artist son it's better to leave the money in the traditional IRA or taxable, and maybe setup a trust. If your goal is to bounce the check to the undertakers it might be something else.

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SteveNet
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Re: Spend IRA First?

Post by SteveNet » Mon Dec 02, 2013 2:06 pm

Epsilon Delta wrote:I think you need to examine your goals.

If your aim is to leave an inheritance to your rich (high tax bracket) doctor daughter getting money in a Roth may be a priority. If you goal is to leave an inheritance to your starving artist son it's better to leave the money in the traditional IRA or taxable, and maybe setup a trust. If your goal is to bounce the check to the undertakers it might be something else.

Life needs to be lived forward, but understood backwards.
Well I know my goals, it's to have enough through retirement for my wife and I without running dry.
Inheritance will be what it is, be it large/medium/small.

Those that will be looking for an inheritance should plan their own goals.
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Electron
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Re: Spend IRA First?

Post by Electron » Mon Dec 02, 2013 2:28 pm

SteveNet wrote:I have the need to draw down to supplement my pension while I wait to take SS at age 70 and wanting to convert my IRA to a Roth over the next ten years...why not just take funds from the IRA (as I have to pay the tax to convert anyway) and leave the taxable account to grow?
The answer may depend on the relative returns you would have achieved in the taxable and sheltered accounts. I learned this recently while modeling asset location decisions in a spreadsheet. It turns out that high returns in a sheltered account do very well over long periods and can trump a higher tax on the way out. High equity returns in a taxable account also do well if capital gains can be deferred and dividends are minimal.

If possible you might consider modeling your situation in a spreadsheet.

Other factors include the following. Ordinary income is undesirable in many ways especially when RMDs start. Ordinary income also reduces the remaining space within the 15% bracket that can be taxed at 0% for Qualified Dividends or Capital Gains. High income in later years can trigger Medicare surcharges, the new Medicare investment income tax, the new 20% capital gains tax rate, and AMT.

The asset location decision became so complex with future unknowns that some in this forum have suggested equal location. Perhaps you could just withdraw 50% from each account and leave it at that.
Electron

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SteveNet
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Re: Spend IRA First?

Post by SteveNet » Mon Dec 02, 2013 3:34 pm

Electron wrote:
SteveNet wrote:I have the need to draw down to supplement my pension while I wait to take SS at age 70 and wanting to convert my IRA to a Roth over the next ten years...why not just take funds from the IRA (as I have to pay the tax to convert anyway) and leave the taxable account to grow?
The answer may depend on the relative returns you would have achieved in the taxable and sheltered accounts. I learned this recently while modeling asset location decisions in a spreadsheet. It turns out that high returns in a sheltered account do very well over long periods and can trump a higher tax on the way out. High equity returns in a taxable account also do well if capital gains can be deferred and dividends are minimal.

If possible you might consider modeling your situation in a spreadsheet.

Other factors include the following. Ordinary income is undesirable in many ways especially when RMDs start. Ordinary income also reduces the remaining space within the 15% bracket that can be taxed at 0% for Qualified Dividends or Capital Gains. High income in later years can trigger Medicare surcharges, the new Medicare investment income tax, the new 20% capital gains tax rate, and AMT.

The asset location decision became so complex with future unknowns that some in this forum have suggested equal location. Perhaps you could just withdraw 50% from each account and leave it at that.
Interesting suggestion 50/50 draw down between taxable and Tira :beer
I can see that giving more options depending on market volatility year to year, and just more over all flexibility.

My taxable account is 100% VTI equity 294K
My TIRA is 100% Bond fund. 220K
Roth is 94k 100% Bond fund

As Taxable account is my Equity allocation I would as you say want to let it ride for as long as possible to smooth out market gyrations and hopefully have it grow more than the bond funds.
A 50/50 (or other mix) lets me make the decision from year to year depending on conditions.
I would like to convert some Tira as well without having to go above the 15% bracket, this might make that possible, as well as harvesting LT cap gains in taxable from time to time.

Certainly something to look into in more depth :sharebeer
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Epsilon Delta
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Re: Spend IRA First?

Post by Epsilon Delta » Mon Dec 02, 2013 3:37 pm

SteveNet wrote:
Epsilon Delta wrote:I think you need to examine your goals.

If your aim is to leave an inheritance to your rich (high tax bracket) doctor daughter getting money in a Roth may be a priority. If you goal is to leave an inheritance to your starving artist son it's better to leave the money in the traditional IRA or taxable, and maybe setup a trust. If your goal is to bounce the check to the undertakers it might be something else.

Life needs to be lived forward, but understood backwards.
Well I know my goals, it's to have enough through retirement for my wife and I without running dry.
Inheritance will be what it is, be it large/medium/small.

Those that will be looking for an inheritance should plan their own goals.
Sorry, I did not word that well. I meant that the best course of action depends on what you want to achieve. When you state your goal you get everybody on the same page and avoid advice that may be inappropriate for your situation.

One factor to consider is you may have to pay large medical costs, such as nursing home fees, later in life. These can be tax deductible so at that point your SS and IRA withdrawals may be tax free, this would favor drawing down your taxable account first. If insurance (private or Medicaid) pays these costs then you don't get the deduction and this does not apply. You also have some knowledge of your health which affects how likely this is.

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Re: Spend IRA First?

Post by Electron » Mon Dec 02, 2013 3:58 pm

SteveNet wrote:Interesting suggestion 50/50 draw down between taxable and Tira :beer
I can see that giving more options depending on market volatility year to year, and just more over all flexibility.
If you do withdraw from your taxable account, it might be a good idea to not reinvest stock dividends. The dividends can be spent directly. That would make even more sense for the case where dividends are taxed at 15%.
Electron

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Re: Spend IRA First?

Post by SteveNet » Mon Dec 02, 2013 4:10 pm

Epsilon Delta wrote:
SteveNet wrote:
Epsilon Delta wrote:I think you need to examine your goals.

If your aim is to leave an inheritance to your rich (high tax bracket) doctor daughter getting money in a Roth may be a priority. If you goal is to leave an inheritance to your starving artist son it's better to leave the money in the traditional IRA or taxable, and maybe setup a trust. If your goal is to bounce the check to the undertakers it might be something else.

Life needs to be lived forward, but understood backwards.
Well I know my goals, it's to have enough through retirement for my wife and I without running dry.
Inheritance will be what it is, be it large/medium/small.

Those that will be looking for an inheritance should plan their own goals.
Sorry, I did not word that well. I meant that the best course of action depends on what you want to achieve. When you state your goal you get everybody on the same page and avoid advice that may be inappropriate for your situation.

One factor to consider is you may have to pay large medical costs, such as nursing home fees, later in life. These can be tax deductible so at that point your SS and IRA withdrawals may be tax free, this would favor drawing down your taxable account first. If insurance (private or Medicaid) pays these costs then you don't get the deduction and this does not apply. You also have some knowledge of your health which affects how likely this is.
No problem :beer
Text on a forum page doesn't always translate it's meaning well.

We are both in good health 'so far'.
We both have what has been described as Cadillac LTHC plans that I took out 10 years ago. 3K per year combined.
Very good health care plan in a Trust, so the original company can't fuss with it.
I do pay about 1,200 per year for dental ins to cover caps, root canals, bridges.
I believe we will pay about 3k per year for medicare combined for the both of us or so I have been told by company reps.

There are so many variables (which I know matter) it's hard to list every time a different post is made.
But I know this information is needed beyond my knowledge as to why.
So I just ask a Generic question not knowing what other information is needed.
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Re: Spend IRA First?

Post by SteveNet » Mon Dec 02, 2013 4:13 pm

Electron wrote:
SteveNet wrote:Interesting suggestion 50/50 draw down between taxable and Tira :beer
I can see that giving more options depending on market volatility year to year, and just more over all flexibility.
If you do withdraw from your taxable account, it might be a good idea to not reinvest stock dividends. The dividends can be spent directly. That would make even more sense for the case where dividends are taxed at 15%.
:wink:
I already have that set up now so that dividends aren't reinvested. It makes the LT Cap Gain harvesting at 0% tax less complicated.
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Re: Spend IRA First?

Post by Electron » Mon Dec 02, 2013 5:33 pm

SteveNet wrote:I already have that set up now so that dividends aren't reinvested. It makes the LT Cap Gain harvesting at 0% tax less complicated.
VTI has had a dividend yield close to 2% so you should have a nice start on your required annual income.

I hadn't thought about capital gain harvesting and assume you could sell shares of VTI one minute and repurchase shares a few minutes later. The prices may be slightly different and there is bid-ask spread. That would require assets in a linked money market fund unless they allow trades settling on the same day to offset each other. I would probably use the mutual fund rather than the ETF and might simply exchange shares from Vanguard Total Stock Market to Vanguard 500 Index. In that case one gets the exact closing day price for each fund although one of the funds will outperform the other over any given period of time. Right now the 500 Index also has a slightly higher dividend yield. Having two funds might offer additional flexibility.

Earlier I mentioned that I don't like a lot of ordinary income. My 15% bracket is half the size of yours, and I have some dividends taxed at 0% and the balance at 15%. Any additional ordinary income pushes some dividends from 0% to 15%, and the ordinary income is also taxed at 10% at present. The net result is a tax of 25% plus any state income tax. If ordinary income gets into the 15% bracket then the incremental tax rate would become 30%.
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Re: Spend IRA First?

Post by SteveNet » Mon Dec 02, 2013 6:04 pm

Electron wrote:
SteveNet wrote:I already have that set up now so that dividends aren't reinvested. It makes the LT Cap Gain harvesting at 0% tax less complicated.
VTI has had a dividend yield close to 2% so you should have a nice start on your required annual income.

I hadn't thought about capital gain harvesting and assume you could sell shares of VTI one minute and repurchase shares a few minutes later. The prices may be slightly different and there is bid-ask spread. That would require assets in a linked money market fund unless they allow trades settling on the same day to offset each other. I would probably use the mutual fund rather than the ETF and might simply exchange shares from Vanguard Total Stock Market to Vanguard 500 Index. In that case one gets the exact closing day price for each fund although one of the funds will outperform the other over any given period of time. Right now the 500 Index also has a slightly higher dividend yield. Having two funds might offer additional flexibility.

Earlier I mentioned that I don't like a lot of ordinary income. My 15% bracket is half the size of yours, and I have some dividends taxed at 0% and the balance at 15%. Any additional ordinary income pushes some dividends from 0% to 15%, and the ordinary income is also taxed at 10% at present. The net result is a tax of 25% plus any state income tax. If ordinary income gets into the 15% bracket then the incremental tax rate would become 30%.
The tax 'gain' harvesting I do once per year after the position gets long term status if it actually has a gain.
I Tax loss harvest the same way (if there is a loss) but as I can't pick a bottom I don't do it often.
Obeying the wash sale rules of course.
The last time was during the 2008 debacle 52% loss I figured that was close enough to a bottom for me :wink:
I have used up all the 'losses' since then however.
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Re: Spend IRA First?

Post by SteveNet » Mon Dec 02, 2013 7:30 pm

From the ORP calculator.
I managed to tweek results I wanted out of it.
I had to make the Roth, tax deferred, and taxable settings the same 5% return even though taxable is equity and the other 2 bonds.
Otherwise ORP saw it was more beneficial to move according to expected return.
Also I had to list a needed ending balance at 500k to get it to convert all of the ira by age 70.
This plan does not include another 40k I have in cash earning .8%...I consider this my emergency now account for unexpected needs during a market downturn.

Looks nice on paper, however my concern is the taxable account lasting as it is equity based it is subject more to the whim of the market and may not last.
Hence my questioning which to draw from first, IRA or Taxable as taxable in my tax bracket is Tax free currently.

If I were to follow this plan and due to market gyrations the taxable account fell very short of age 70, where to draw from? Roth or IRA instead of Ira conversion?


.....................Account balance...................................................................................Withdrawal report
Image Image



.........Federal Tax report.............................................................Input info
Image Image
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Re: Spend IRA First?

Post by SGM » Mon Dec 02, 2013 8:05 pm

In the 15% bracket there is often and opportunity for an inexpensive Roth conversion, but there is also the opportunity for an expensive Roth conversion mistake. The higher rate on SS was mentioned. I am not so familiar with the most recent tax changes. Are taxpayers in the 15% tax rate still paying 0% on their qualified dividends and long term capital gains?
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SteveNet
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Re: Spend IRA First?

Post by SteveNet » Mon Dec 02, 2013 8:09 pm

SGM wrote:In the 15% bracket there is often and opportunity for an inexpensive Roth conversion, but there is also the opportunity for an expensive Roth conversion mistake. The higher rate on SS was mentioned. I am not so familiar with the most recent tax changes. Are taxpayers in the 15% tax rate still paying 0% on their qualified dividends and long term capital gains?
Yes it's still 0% as long as one stays in the 15% tax bracket.

EDIT, however the qualified dividends will still increase the tax return income level even though it's not taxable.
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Re: Spend IRA First?

Post by livesoft » Mon Dec 02, 2013 8:31 pm

One should not believe the "Taxes" column of the ORP output until confirmed by TurboTax. I found that I could withdraw/convert thousands of dollars more per year and pay the tax that ORP suggested. Conversely, I could withdraw/convert less and pay lower taxes. That's why I mentioned that one should crosscheck the ORP suggestions with TurboTax.
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Re: Spend IRA First?

Post by VictoriaF » Mon Dec 02, 2013 9:30 pm

SteveNet wrote:I've been researching withdrawal draw down procedures for the past week or so and something I ran across this week but can't find again (It may have been in this forum) was the possibility of taking distributions from an IRA first rather than from a Taxable account.

Having a Taxable account, a IRA and a Roth account.
And being in the 15% tax bracket long term Capital Gains are taxed at 0%, making it essentially a Roth Tax wise. Given current tax laws of course.
I have the need to draw down to supplement my pension while I wait to take SS at age 70 and wanting to convert my IRA to a Roth
over the next ten years...why not just take funds from the IRA (as I have to pay the tax to convert anyway) and leave the taxable account to grow?

Is this a potential good method? It kind of flies in the face of what I thought common practice of taxable draw down first.
Age 60 this March 2014 so IRA distributions are penalty free.

If there is discussion already on this issue I apologize (I tried to find it) and please direct me to it.

Thanks,
SteveNet
Hi Steve,

I posed a very similar question to the Bogleheads Expert Panel in October 2012. Here is a link to how I phrased it. I received a 2-part answer:
1. Investing is easy, tax management is difficult.
2. Use the ORP retirement calculator to model various scenarios.

Victoria
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Re: Spend IRA First?

Post by SteveNet » Mon Dec 02, 2013 11:21 pm

livesoft wrote:One should not believe the "Taxes" column of the ORP output until confirmed by TurboTax. I found that I could withdraw/convert thousands of dollars more per year and pay the tax that ORP suggested. Conversely, I could withdraw/convert less and pay lower taxes. That's why I mentioned that one should crosscheck the ORP suggestions with TurboTax.



Ah thats what the Turbo tax portion of your comment meant. I was unsure if it had some link with ORP as a mutual program or not.
Truth be told, I have been perplexed by some of the Tax outcomes of ORP while looking at it's results, but I just waved it off as something the program knew that I of course didn't.
If this is true that ORP's tax results are flawed then it is a useless program.
I will try to verify some of the results even though I don't use turbotax, perhaps taxact will suffice.


VictoriaF wrote:
SteveNet wrote:I've been researching withdrawal draw down procedures for the past week or so and something I ran across this week but can't find again (It may have been in this forum) was the possibility of taking distributions from an IRA first rather than from a Taxable account.
Having a Taxable account, a IRA and a Roth account.
And being in the 15% tax bracket long term Capital Gains are taxed at 0%, making it essentially a Roth Tax wise. Given current tax laws of course.
I have the need to draw down to supplement my pension while I wait to take SS at age 70 and wanting to convert my IRA to a Roth
over the next ten years...why not just take funds from the IRA (as I have to pay the tax to convert anyway) and leave the taxable account to grow?

Is this a potential good method? It kind of flies in the face of what I thought common practice of taxable draw down first.
Age 60 this March 2014 so IRA distributions are penalty free.

If there is discussion already on this issue I apologize (I tried to find it) and please direct me to it.

Thanks,
SteveNet
Hi Steve,

I posed a very similar question to the Bogleheads Expert Panel in October 2012. Here is a link to how I phrased it. I received a 2-part answer:
1. Investing is easy, tax management is difficult.
2. Use the ORP retirement calculator to model various scenarios.

Victoria
Thanks for the Link Victoria, I will be visiting it soon! :beer

Edit... Oh I see, the reply came independently and without a forum posting or discussion.
Not to diminish an expert panel's opinion...but I hope they don't get paid to give those kind of answers.
JK I know they don't get paid... so I guess the "you get what you pay for" adage still applies.
Being frugal is hard to learn, but once learned is hard to stop.

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SteveNet
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Re: Spend IRA First?

Post by SteveNet » Tue Dec 03, 2013 12:03 am

livesoft wrote:One should not believe the "Taxes" column of the ORP output until confirmed by TurboTax. I found that I could withdraw/convert thousands of dollars more per year and pay the tax that ORP suggested. Conversely, I could withdraw/convert less and pay lower taxes. That's why I mentioned that one should crosscheck the ORP suggestions with TurboTax.
Apparently it would seem your assessment of ORP's tax calculation is correct.
For example...
In the withdrawal report I posted age 60
61k converted to Roth with 31K of pension income would yield 10K in taxes... according to Taxact and ORP.
However, the 29k withdrawn from the "AfterTax" account has no bearing on the tax results at all.
In their explanation they assume there are no Capital gains on the "AfterTax" account. (obviously they can't know)
Taxable dividends are not accounted for as well.
So either you have to make sure you have no capital gains or Dividends, or, somehow fudge the input numbers to try to account for them.
Certainly something anyone using this calc should be aware of.
I will go thru (tomorrow) each line to see if their results remain constant in this way and otherwise accurate.

Thanks for the heads up :beer
Being frugal is hard to learn, but once learned is hard to stop.

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VictoriaF
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Re: Spend IRA First?

Post by VictoriaF » Tue Dec 03, 2013 11:06 am

SteveNet wrote:Oh I see, the reply came independently and without a forum posting or discussion.
Not to diminish an expert panel's opinion...but I hope they don't get paid to give those kind of answers.
JK I know they don't get paid... so I guess the "you get what you pay for" adage still applies.
It's a bit more complicated. A simple answer came from a live panel at BH11 in 2012. But a couple people have followed up with me privately. And so I was actually getting much more than I paid for. Bogleheads conferences are a very good place to discuss your private questions in real time in a face-to-face discussion.

The reason I pointed to my old question it to show that you and I have very similar situations and questions.

Victoria
WINNER of the 2015 Boglehead Contest. | Every joke has a bit of a joke. ... The rest is the truth. (Marat F)

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