Planning ahead

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Pilgrim211
Posts: 8
Joined: Sat Apr 01, 2017 7:34 pm

Planning ahead

Post by Pilgrim211 » Sun Jul 16, 2017 6:11 pm

Are there general guidelines on how to plan ahead for tax-efficiency in the withdrawal phase? I'm trying to wrap my mind around multiple income streams in the future.

Here's where I am now: single, 15% marginal tax rate (with headroom in that bracket for now), employed and in my mid-fifties.
I've been actively saving in my workplace 403(b) to get the company match, when offered, and had two small IRA's, one traditional and one Roth, and a very small frozen pension, but that was it for retirement savings. (SS of course would help as well.) That changed with inheriting a taxable brokerage account and a traditional IRA. Dealing with dividends and capital gains has been a learning curve, although I admit a nice learning curve to be on! The changes are enough to make a difference, but not enough to "quit my day job."

I'm currently required to take annual RMD's from the inherited Traditional IRA. The RMD's, supplemented by the taxable account, will allow me to max out annual Roth contributions until I no longer have earned income.I have also converted my small personal Traditional IRA to a Roth since funds were available to cover taxes.

Investment total is in low six figures and the various accounts break down as follows.
Taxable: 48%
Inherited IRA: 28%
Roth: 9%
403(b): 15%

Taxable is higher than I would like at this stage. I plan to withdraw as needed from the taxable account for living expenses, replacing wages, in order to significantly increase my 403(b) deferrals. Over the next several years this will reduce the taxable account and increase the percentage in 403(b) and Roth. After 59 1/2, I may do in-service withdrawals from the 403(b) to an IRA, converting to a Roth IRA, to the top of the 15% tax bracket.

So here are the big questions in my mind:
1) It's been recommended previously to consider aggressively going after the 403(b), backfilling from taxable for living expenses. Are there limits to that suggestion, or any downsides I might not see?
2) What would be an appropriate % to leave in taxable, or would you simply shift as much as possible as quickly as possible into tax-preferred accounts? Why?
3) Are there generally accepted suggestions on which sources to use when, upon retirement? Retirement before 59 1/2 is extremely unlikely, but I might consider doing so before full retirement age of 67.
4) Is shifting money from 403(b) to a Roth IRA for future tax-efficiency always advisable, if the fund choices within 403(b) are reasonable anyway? I would guess after SS and my own RMD's kick in, that I might face a higher tax bracket.

Thanks, I appreciate input as I sort through this unfamiliar territory.

dwickenh
Posts: 687
Joined: Sun Jan 04, 2015 9:45 pm
Location: Illinois

Re: Planning ahead

Post by dwickenh » Sun Jul 16, 2017 8:09 pm

Pilgrim211,

Great question!! I recently asked the same question on Investopedia and it was answered multiple times with some great ideas.

http://www.investopedia.com/advisor-net ... dium=email

I hope this helps with some of your questions.

Dan
The market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people to patient people.” | — Warren Buffett

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Tyler Aspect
Posts: 372
Joined: Mon Mar 20, 2017 10:27 pm
Location: California
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Re: Planning ahead

Post by Tyler Aspect » Sun Jul 16, 2017 8:11 pm

Pilgrim211 wrote:Are there general guidelines on how to plan ahead for tax-efficiency in the withdrawal phase? I'm trying to wrap my mind around multiple income streams in the future.
Welcome to the forum.

Here's where I am now: single, 15% marginal tax rate (with headroom in that bracket for now), employed and in my mid-fifties.
I've been actively saving in my workplace 403(b) to get the company match, when offered, and had two small IRA's, one traditional and one Roth, and a very small frozen pension, but that was it for retirement savings. (SS of course would help as well.) That changed with inheriting a taxable brokerage account and a traditional IRA. Dealing with dividends and capital gains has been a learning curve, although I admit a nice learning curve to be on! The changes are enough to make a difference, but not enough to "quit my day job."


I'm currently required to take annual RMD's from the inherited Traditional IRA. The RMD's, supplemented by the taxable account, will allow me to max out annual Roth contributions until I no longer have earned income.I have also converted my small personal Traditional IRA to a Roth since funds were available to cover taxes.

Investment total is in low six figures and the various accounts break down as follows.
Taxable: 48%
Inherited IRA: 28%
Roth: 9%
403(b): 15%
The key point is the 15% marginal tax rate and the income distance to the top of the 15% marginal tax rate. As long as you are below the top of the 15% marginal tax rate any long term realized capital gains is taxed at 0%. For this example, your Roth IRA would hold an international stock fund, while your inherited IRA and 403b account would hold bond funds. Your taxable would have a number of different equity funds.

You would harvest long term capital gains every year to the top of the 15% tax bracket into a US stock index fund, say the Total Stock Market Index. When your taxable account only contains the Total Stock Market Index then you could begin to harvest into Tax Managed Capital Appreciation. You have the option of harvesting some capital gains to a money market account for living expenses.


Taxable is higher than I would like at this stage. I plan to withdraw as needed from the taxable account for living expenses, replacing wages, in order to significantly increase my 403(b) deferrals. Over the next several years this will reduce the taxable account and increase the percentage in 403(b) and Roth. After 59 1/2, I may do in-service withdrawals from the 403(b) to an IRA, converting to a Roth IRA, to the top of the 15% tax bracket.

So here are the big questions in my mind:
1) It's been recommended previously to consider aggressively going after the 403(b), backfilling from taxable for living expenses. Are there limits to that suggestion, or any downsides I might not see?
2) What would be an appropriate % to leave in taxable, or would you simply shift as much as possible as quickly as possible into tax-preferred accounts? Why?
Taxable account can be close to tax free when you are in the 15% tax bracket, as shown above.

3) Are there generally accepted suggestions on which sources to use when, upon retirement? Retirement before 59 1/2 is extremely unlikely, but I might consider doing so before full retirement age of 67.
4) Is shifting money from 403(b) to a Roth IRA for future tax-efficiency always advisable, if the fund choices within 403(b) are reasonable anyway? I would guess after SS and my own RMD's kick in, that I might face a higher tax bracket.

Thanks, I appreciate input as I sort through this unfamiliar territory.
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House Blend
Posts: 4209
Joined: Fri May 04, 2007 1:02 pm

Re: Planning ahead

Post by House Blend » Mon Jul 17, 2017 12:20 pm

Pilgrim211,

Having learned about divs and cap gains, I think the next learning curve to climb is the one involved with taxation of SS benefits. For example, see the wiki:
https://www.bogleheads.org/wiki/Taxatio ... y_benefits

Do some rough planning of when you'll retire, when you'll claim benefits, and how large that benefit will be. If you suffer the unspeakable tragedy of having high income in retirement, then as much as 85% of your SS benefit will be taxable. For very low amounts (or Roth-only income), none of the benefit will be taxable. In between you will smoothly pass from 0% to 85% taxable, and see some surprisingly high marginal tax rates during that transition. This doesn't mean that you wll be paying high taxes; it just alters the cost/benefit analysis of marginal decisions, such as how much to convert from tax-deferred to Roth.

In fact, folks who delay claiming SS until later often use the pre-SS, pre-RMD period for doing more Roth conversions.

Pilgrim211
Posts: 8
Joined: Sat Apr 01, 2017 7:34 pm

Re: Planning ahead

Post by Pilgrim211 » Mon Jul 17, 2017 6:19 pm

Thanks for the input.

Dan, I found that article helpful, it addressed some of my concerns. I was surprised that some suggested that high a ratio (40-50%) for a taxable account, yet it sure gives me something to consider.

HouseBlend, you have hit on some of my concern...am I being too aggressive in trying to significantly increase the workplace retirement account by using some withdrawals from taxable account, and creating a headache down the road with shifting funds from 403(b) to Roth between 59 1/2 and the start of SS and/or my own RMD's. Yet that's the main way I see to get more into the Roth beyond the annual $6500 limit. It sure seems having the Roth will allow much more flexibility when I do retire.

Once again, thanks to those who have responded. I want to think clearly and make wise choices during these next several years.

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