Withdrawal Options?

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soazfree
Posts: 41
Joined: Fri Sep 04, 2015 8:49 pm

Withdrawal Options?

Post by soazfree » Sat Aug 12, 2017 11:02 am

Well I’ve been thinking and trying to evaluate if there’s anything unique or special to my upcoming situation for my withdrawal strategy for next year when my early retirement pension/annuity payments stop. Specifically, since the bulk of my money is going to be withdrawn from my tIRA at Vanguard, my understanding is that the cost basis/capital gains stuff is moot and that I will just need to pay taxes as if it were normal income etc.
Reading the various posts on Back Door Roths etc. I’m curious if there is a preferred way to take my monthly withdrawals? i.e. should I take more than I need each month and do a Roth (if I’m allowed to?) to try and minimize any impact for future RMDs? Other than keeping my AA where I want it, I’m trying to make sure I don’t do anything that I shouldn’t.

I’ll admit that my head starts to spin when I try to read up on all of the various “strategies”. Not looking for anything fancy, just a reasonable and if possible, simple approach.

In a nutshell, here is my status
Me: 59, still contracting part time but may/could stop at any time
Wife: 61, Retired
Total tIRA in Vanguard 3 Fund Portfolio ~ $2.5 mil (expect to add about $300K from pension in next year)
Various Cash Savings Accts ~$150K
Will start monthly withdrawals of ~$6500 in August 2018
Still working through when to start SS, will probably take wife’s earlier and defer mine
Another wildcard is that the wife stands to inherit a sizeable amount from her father in the near future.

Thanks

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WoodSpinner
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Joined: Mon Feb 27, 2017 1:15 pm

Re: Withdrawal Options?

Post by WoodSpinner » Sat Aug 12, 2017 12:08 pm

OP,

I think you will find it bennificial to take more than your monthly need as a Roth Conversion and start investing in a Roth account. You can use the basis in the account(e.g. Funds you paid taxes on) at any point, but you need to wait 5 years before using any of the gains.

A couple of reasons:
  • - You may be subject to significantly higher taxes on your RMDs than you are paying today
    - Money in a Roth account can be used for lumpy expenses or Emergency fund, while still growing tax free
    - There are estate planning advantages in having larger Roth accounts (Accumulation Trusts etc.)
    - Money in a Roth is worth more than money in a 401k/IRA (no add to taxes owed, but tax free growth)
Since each of us has unique circumstances , its best to model your retirement cashflow and expected taxes to evaluate and tune recommendations like these. If you decide to do these types of conversions, you do need to account for the tax bill and changes in marginal tax rates.

FWIW, I am in a similar situation (at least from the info you provided) and will be aggressively pursuing Roth Conversions for my early retirement.

Good luck. 8-)

John Z
Posts: 255
Joined: Sun Nov 14, 2010 5:42 pm

Re: Withdrawal Options?

Post by John Z » Sat Aug 12, 2017 12:17 pm

OP,
You may want to examine McClung's book, Living Off Your Money for retirement withdrawal strategies and which ones are optimal. You don't need to buy anything but go to livingoffyourmoney.com where you can view the TofC and download for free the first 3 chapters. Chapter 3 is the best chapter and can answer some of your questions about withdrawal strategies. It's written in easy to follow style and hardly has any mathematical formulas.
John

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CAsage
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Joined: Sun Mar 27, 2016 6:25 pm

Re: Withdrawal Options?

Post by CAsage » Sun Aug 13, 2017 8:25 am

You may be in the "sweet spot" for doing Roth conversions. Suggest looking at several different withdrawal amounts for the T-IRA and Roth conversions, to maximize your use of the married filing jointly tax brackets. Depending on your income and tax bracket... most recommendations are to do Roth conversions up to the top of the 15% bracket for sure, and higher if you think your SS/pension/RMD will be higher in the future. If tax brackets change, reconsider.

Note that I personally plan to withdraw IRA funds to live on monthly and withhold no taxes, and then withdraw my entire federal tax obligation in December and withhold 100%. And I do Roth conversions every January.....

You really have to look at the tax brackets, the math and make some predictions to optimize this.
Salvia Clevelandii "Winifred Gilman" my favorite. YMMV; not a professional advisor.

ResearchMed
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Re: Withdrawal Options?

Post by ResearchMed » Sun Aug 13, 2017 9:40 am

John Z wrote:
Sat Aug 12, 2017 12:17 pm
OP,
You may want to examine McClung's book, Living Off Your Money for retirement withdrawal strategies and which ones are optimal. You don't need to buy anything but go to livingoffyourmoney.com where you can view the TofC and download for free the first 3 chapters. Chapter 3 is the best chapter and can answer some of your questions about withdrawal strategies. It's written in easy to follow style and hardly has any mathematical formulas.
John
This is interesting, thanks for the suggestion.

In looking though the TOC, there is a mention of a "Blanket of Inflation-Adjusted SPIAs".
What's that?

Also note, earlier, author puts "inflation-adjusted deferred immediate annuities" in a "less desirable" category.
(As an aside, shouldn't that be something like "inflation adjusted deferred single payment annuities", rather than "...deferred immediate..."?)

Thanks.

And is a duvet coming next somewhere?
That sounds very comfy and *safe*
:happy

RM
This signature is a placebo. You are in the control group.

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BL
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Re: Withdrawal Options?

Post by BL » Sun Aug 13, 2017 10:22 am

You will want to convert directly to Roth IRA, not withdraw and then "contribute" to Roth, which is a separate type of contribution.
Edit for correction
If you or spouse are earning money, you may still contribute $5500 6500/year directly to a Roth.

Use a tax program to try "what if" ideas, not just for now, but after age 70.5 and when there is just a survivor with higher tax bracket with increasing RMDs. Taxcaster might work, I don't know for sure if it would miss something.

If you are still converting while taking RMDs, you must do the RMD first.

Delaying SS, at least for higher earner, is the best inflation-increased annuity available.

Jane Bryant Quinn, in How to Make your money last, has an easy-to-read chapter on annuities. Great book to have on hand before retirement. Get the recently updated book.
Last edited by BL on Mon Aug 14, 2017 2:21 pm, edited 1 time in total.

bayview
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Location: WNC

Re: Withdrawal Options?

Post by bayview » Sun Aug 13, 2017 3:18 pm

CAsage wrote:
Sun Aug 13, 2017 8:25 am
You may be in the "sweet spot" for doing Roth conversions. Suggest looking at several different withdrawal amounts for the T-IRA and Roth conversions, to maximize your use of the married filing jointly tax brackets. Depending on your income and tax bracket... most recommendations are to do Roth conversions up to the top of the 15% bracket for sure, and higher if you think your SS/pension/RMD will be higher in the future. If tax brackets change, reconsider.

Note that I personally plan to withdraw IRA funds to live on monthly and withhold no taxes, and then withdraw my entire federal tax obligation in December and withhold 100%. And I do Roth conversions every January.....

You really have to look at the tax brackets, the math and make some predictions to optimize this.
As noted above, don't you have to take the RMD before converting to a Roth?
The continuous execution of a sound strategy gives you the benefit of the strategy. That's what it's all about. --Rick Ferri

soazfree
Posts: 41
Joined: Fri Sep 04, 2015 8:49 pm

Re: Withdrawal Options?

Post by soazfree » Sun Aug 13, 2017 9:33 pm

Thanks for all of the suggestions. I'm not sure why I'm having a hard time trying to figure this out etc. I suppose I can always call my Flagship rep and get someone at VG to talk to me on this as well.

Thanks again and I welcome any other advice!

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CAsage
Posts: 710
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Re: Withdrawal Options?

Post by CAsage » Mon Aug 14, 2017 6:53 am

bayview wrote:
Sun Aug 13, 2017 3:18 pm

As noted above, don't you have to take the RMD before converting to a Roth?
The OP is 59, so RMD don't kick in until 70. As in, not yet "required". I still plan to pull out of my IRA before then to live! And you are correct, you must take RMD (when required) before any Roth conversions; RMD cannot be converted. Uncle Sam really wants that money taken out.
Salvia Clevelandii "Winifred Gilman" my favorite. YMMV; not a professional advisor.

John Z
Posts: 255
Joined: Sun Nov 14, 2010 5:42 pm

Re: Withdrawal Options?

Post by John Z » Tue Aug 15, 2017 10:32 am

ResearchMed wrote:
Sun Aug 13, 2017 9:40 am


In looking though the TOC, there is a mention of a "Blanket of Inflation-Adjusted SPIAs".
What's that?

Also note, earlier, author puts "inflation-adjusted deferred immediate annuities" in a "less desirable" category.
(As an aside, shouldn't that be something like "inflation adjusted deferred single payment annuities", rather than "...deferred immediate..."?)

Thanks.

And is a duvet coming next somewhere?
That sounds very comfy and *safe*
:happy

RM
RM,
Since you asked I'll try to answer although I have a copy of the book and will not be instituting anything recommended in the fixed income or guaranteed Income chapters since the only GI I have is SS and do not plan to incorporate any kind of annuities in my portfolio.

Simple first: To paraphrase the two short paragraphs on a Blanket of Inflation-Adjusted SPIAs, the author states: "A blanket of inflation-adjusted SPIAs means locking in the desired rate from the start {of retirement}, ensuring the full retirement is protected." Using SPIAs alone is simple and effective when affordable but this strategy can require a substantial percentage of total assets. He then illustrates two charts showing failure rates (running out of money) for 75% put into the SPIA with only 25% of portfolio left and a better outcome with 60% of the portfolio in the SPIA.

Long answer: As you can see by the TofC, Chapter 3 explores about a dozen different harvesting (withdrawal) strategies and using backtesting results shows how each strategy performs with a success rate (not running out of money) using different withdrawal rates and stock/bond allocations.

Withdrawing a fixed amount isn't optimal so as the book continues, it goes into greater and greater detail to enhance your harvesting strategy by using variable withdrawals (since markets go up and down - you need to have guidelines and controls in harvesting. Next comes information about harvesting with a portfolio having a high Harvesting Ratio, then chapters on how to construct a portfolio that will give you a high Harvesting Ratio. All of this to aid in maximizing your withdrawals while keeping risks low. Chapter 10 puts it all together. But then he goes further and provides a large chapter on using and integrating any fixed income that you might have. And again, since I only have SS I don't feel I want to get into the more complex area of integrating SS with IRA withdrawals. The author even covers topics like planning for leaving an amount for inheritance and/or charity.

So this book allows you to go as deep as you wish, but just understanding chapter 3 will get you a long way toward Living Off Your Money longer!
John

John Z
Posts: 255
Joined: Sun Nov 14, 2010 5:42 pm

Re: Withdrawal Options?

Post by John Z » Tue Aug 15, 2017 10:37 am

Sorry, forgot to reply to your Inflation-Adjusted Deferred Immediate Annuities comment.
These don't start paying until 20 or 30 years down the road. Sounds good but these vehicles have a serious flaw: the inflation adjustment doesn't start until payments begin. This effectively cripples the viability of long term DIAs in retirement because of inflation risk.
This information is the author's and I am only condensing what is said about these vehicles.
John

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