Retirement withdrawals

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bobbyrx
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Retirement withdrawals

Post by bobbyrx » Sat May 24, 2008 9:25 am

Requesting advice on optimal sequence of withdrawals in retirement. I plan to retire at end of year- age 63. I have 75% of assets in IRAs- diversified index funds and fixed (40/60) and 25% in taxable- mostly in Vanguard Intermediate Tax-exempt (VWIUX)- to minimize current taxes.

Should I:
1) Deplete the taxable account first- would be finished by 70.5 years old and then tap tax-deferred.
2) Withdraw and spend about 2% of tax-deferred plus taxable to take advantage of 15% tax-bracket and this would extend shelf-life of taxable assets.
3) Do same as #2 but, instead of spending tax-deferred withdrawals, roll them over into a new Roth IRA.

Or is there a better strategy.
Thanks for your help.
Bob

retiredjg
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Re: Retirement withdrawals

Post by retiredjg » Sat May 24, 2008 4:10 pm

bobbyrx wrote:Requesting advice on optimal sequence of withdrawals in retirement. I plan to retire at end of year- age 63. I have 75% of assets in IRAs- diversified index funds and fixed (40/60) and 25% in taxable- mostly in Vanguard Intermediate Tax-exempt (VWIUX)- to minimize current taxes.

Should I:
1) Deplete the taxable account first- would be finished by 70.5 years old and then tap tax-deferred.
2) Withdraw and spend about 2% of tax-deferred plus taxable to take advantage of 15% tax-bracket and this would extend shelf-life of taxable assets.
3) Do same as #2 but, instead of spending tax-deferred withdrawals, roll them over into a new Roth IRA.

Or is there a better strategy.
Thanks for your help.
Bob
I don't have the answer and actually have similar questions in my own mind. Here are some random thoughts.

I don't think I would do #1. I think I'd be spending tax-deferred so that the required minimums at 70.5 would not be so big. Maybe better yet, I'd spend tax-deferred and taxable together to stay in the 15% tax bracket and convert something to Roth if that could be done without going into the 25% tax bracket.

Or maybe do a combination. Spend only from IRA for 1 year to deplete it. Spend mostly or only from taxable the next year, stay in low tax bracket, have no capital gains (till 2010 only), and convert as much to Roth as possible. Could be tricky because even $1 into the 25 % tax bracket and you would have to pay your capital gains. You could try to bunch up your deductions in year 2 as well. Or maybe you could bunch up your deductions in year 1 and bring your tax rate down in the year you are living on IRA.

I'm kind of rambling here because I just don't know what is best and I'm thinking of ideas as I type. I'm pretty sure I would not deplete taxable because more different types of buckets give you more flexibility as things, such as tax law, change. It looks like I will have little to no taxable by the time I'm 59.5 and I think that will be a disadvantage.

I hope someone can put forth some good creative ideas on this. I need answers too! jg

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mickeyd
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Post by mickeyd » Sat May 24, 2008 4:22 pm

Or is there a better strategy.
Thanks for your help.
Bob
Hey Bob. You have an interesting Q here. I tend to go with #1 however, I still try to do some Roth conversion up to the point where I would jump into the next bracket.

It's nice to have options, is it not?
Part-Owner of Texas | | “The CMH-the Cost Matters Hypothesis -is all that is needed to explain why indexing must and will work… Yes, it is that simple.” John C. Bogle

dbr
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Post by dbr » Sat May 24, 2008 4:25 pm

If you want to optimize taxation with respect to withdrawal sequence, I don't think there is any alternative other than to write up a spreadsheet to model possible tax scenarios then play with some alternatives. The outcome depends extremely on the details of individual situations including size of other income (rents, pensions, annuities, defered compensation, other employment), timing of IRA withdrawals, timing of SS election, etc., size of assets in tax deferred vs. taxable, marital status, state tax considerations, etc., etc., etc.

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bobbyrx
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Post by bobbyrx » Sat May 24, 2008 4:30 pm

Thanks for your responses. I have really been moving away from Option #1- spend all taxable first. I think it is good, as noted, to maintain a mix especially since I think that tax rates will probably be higher in future. That is why I was thinking of not only accessing some IRA funds to take advantage of lower tax bracket, but rolling them into a Roth where they will, hopefully, grow tax free forever.

I would love to hear more thoughts on this topic.

Thanks
Bob

retiredjg
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Post by retiredjg » Sat May 24, 2008 4:41 pm

bobbyrx wrote: That is why I was thinking of not only accessing some IRA funds to take advantage of lower tax bracket, but rolling them into a Roth where they will, hopefully, grow tax free forever.
How is using your IRA money going to lower your tax bracket? It's going to raise mine! Whatever trick you know, you need to share! jg

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bobbyrx
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Post by bobbyrx » Sat May 24, 2008 5:51 pm

Withdrawing IRA assets will not of course lower my tax bracket. What I was thinking is that, after adding up SS and a modest pension, I might chose to withdraw just enough tax-deferred to hit the top of the 15% bracket- which in 2009 will be $65,100 after standard/deduction + personal exemptions (2). Pre-deductions- that would be $84,300.
After doing that, I would supplement additional spending needs with taxable savings.
Not claiming this is wisest move- just looking for other opinions.

not2late
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Post by not2late » Sat May 24, 2008 5:57 pm

Very Good Topic

I have a few qts.

1. Bob , Cong.'s on retirement . Will it still be best for you to hold tax exp bonds after retirement ?

2. If not , what do experts say...

a. Hold taxable bonds or hold equity in taxable and bonds in IRA ?

b. In withdrawal stages , is it wise to hold equity in taxable if funds would be
needed from taxable acc to live on ( exposure to selling when stocks are down) ?

c. What is a suggested taxable A.A. under Bob's situation ?

3. Have seen very few opinions on what future tax brackets will look like...

a. I have heard 1 party mention LTCG will definitely jump and I think
I recall it was a major increase .

b. I assume most here see at least noticeably changes in the income
brackets . Anyone want to take a stab ?

4. I have heard above 2 taxes today are historically very small and
for some periods , not too long ago , were staggering . But I assume they were not adjusted for inflation . Can anyone shed some light ?


The only reference I can recall is when my mom died about 10 yrs ago ,
seems like I recall a 575-625 estate tax limit .

[color=darkred]Political portion deleted[/color]

Bob , good luck w/ your decisions but isn't it sad we are placed in these
awkward situations at a time in our life when we just don't need this stuff?

baldeagle
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Post by baldeagle » Sat May 24, 2008 8:03 pm

bobbyrx,

I agree with dbr -- you will probably have to model your alternatives with a spreadsheet or program. There is no one-fits-all solution.

I had the same questions you have three years ago when I retired. I had most of the portfolio in IRA with a small amount in taxable and an even smaller amount in Roth. My model said to live on the IRA, pay taxes with the taxable, and Roth convert to the top of the 15% bracket. Tax diversification.

But I have remodeled the process and it shows that it is a bit better to live off the taxable until it is gone, and consequently Roth convert even more until I am 70.5 (I am age 63 now). My model shows that to be a superior solution for me using total portfolio value over time.

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BigFoot48
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Post by BigFoot48 » Sat May 24, 2008 8:03 pm

I used my taxable money until it got down to $50,000, (but $20,000, enough to pay for emergency house repairs, etc. would be adequate), then I switched over to ~4% withdrawals from my IRA. I'm in the 15% bracket and will probably remain there so doing Roth conversions don't seem to be worth the effort, but future tax rate increases may make my decision a bit naive.
Retired | Two-time in top-10 in Bogleheads S&P500 contest; 12-time loser

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bobbyrx
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Post by bobbyrx » Sat May 24, 2008 9:11 pm

Thanks for the responses so far. As I had been doing, it seems that a number of you have been rethinking the conventional wisdom of simply depleting all taxable dollars first.
"not2late" raises another point that I did not include in first post. Right now, in high tax bracket, taxable in tax-exempt seems to make sense, but after retirement... I was thinking of putting all taxable in, perhaps, the new V. Managed Payout Distribution fund, hopefully maintaining principal, and supplementing that income with 2% withdrawals from balanced IRA.

Any thoughts?

Thanks
Bob

Cubsfan
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I'd hire a good financial advisor

Post by Cubsfan » Sun May 25, 2008 6:56 am

This is a pretty self-reliant group, but once you get close to retirement, you're in the "red zone". You have to make a number of important decisions that can have long term ramifications. Here are several that I can think of:

1. When do you (and your spouse, if applicable) start taking social security?
2. How much, if any, of your savings should you annuitize? If any, you need to think about survivor benefits, inflation adjustments, where the money is coming from, how much of the benefit is insured in your state if the insurance company goes belly up, etc.
3. Withdrawal strategy, including sequence of withdrawals
4. Roth conversions
5. Insurance "checkup" - make sure you have a solid game plan including health insurance and long term care
6. Estate planning

IMHO, you're at a point where a good financial advisor has the potential to save you far more than the cost of the fees. (the flip side of that argument is that a bad financial advisor can cost you far more than the fees that are actually disclosed to you).

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