Spending Taxable to Zero during Retirement

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
OffGridder
Posts: 51
Joined: Thu Jul 23, 2015 8:03 am
Location: Eastern WA.

Spending Taxable to Zero during Retirement

Post by OffGridder » Fri Nov 17, 2017 3:18 pm

Retired 2 years ago at age 58. So far it has been great.

I am burning down my taxable brokerage account first. The funds are being used for expenses plus income tax on Roth conversions between now and age 70 when I will take SS.

I know the general guideline is to burn down your taxable first and then tap the tax deferred and Roth last. My question to the retirees on the forum is, are you actually burning your taxable to zero or will you maintain some minimum amount in taxable through out retirement? I mean beyond the checking account you use to pay bills. My plan has been to burn down my taxable to the level of my cash reserves, and keep that amount in a money market, CDs and I-Bonds. I am conservative, so in my case that is 2 years of expenses. I guess, I could keep those in tax protected space too, probably the Roth. I am married, so it will probably be easier and quicker for my spouse to access the cash reserves in a joint taxable account if I pass first. What do you all do or plan to do?

Thanks,
Dave
"Goodness is the only investment that never fails." | H.D. Thoreau

smitcat
Posts: 4617
Joined: Mon Nov 07, 2016 10:51 am

Re: Spending Taxable to Zero during Retirement

Post by smitcat » Fri Nov 17, 2017 3:28 pm

We will be generally following the guideline article below and checking/adjusting the details with the RPM calculator as well as IORP.

https://www.kitces.com/blog/tax-efficie ... ing-needs/

mptfan
Posts: 5714
Joined: Mon Mar 05, 2007 9:58 am

Re: Spending Taxable to Zero during Retirement

Post by mptfan » Fri Nov 17, 2017 3:49 pm

OffGridder wrote:
Fri Nov 17, 2017 3:18 pm
I know the general guideline is to burn down your taxable first and then tap the tax deferred and Roth last.
There is no such general guideline. This quote from the article cited above is instructive...

For most retirees, the tax efficient liquidation of a retirement portfolio requires coordinating between both taxable brokerage accounts and pre-tax retirement accounts like an IRA or 401(k).
Last edited by mptfan on Fri Nov 17, 2017 3:51 pm, edited 1 time in total.

livesoft
Posts: 69586
Joined: Thu Mar 01, 2007 8:00 pm

Re: Spending Taxable to Zero during Retirement

Post by livesoft » Fri Nov 17, 2017 3:49 pm

I am retired and not spending any of my tax-advantaged assets at the present time. I expect that my taxable assets will last quite a while and well past age 70.5 when RMDs might kick in for any remaining tax-deferred accounts that I have. In the meantime, it's Roth conversions every year.

So to answer your question: No, I don't think I will spend taxable to zero during retirement.
Wiki This signature message sponsored by sscritic: Learn to fish.

User avatar
midareff
Posts: 6465
Joined: Mon Nov 29, 2010 10:43 am
Location: Biscayne Bay, South Florida

Re: Spending Taxable to Zero during Retirement

Post by midareff » Fri Nov 17, 2017 4:04 pm

Retired 6 years (time flew bye) and turn 70 next month so will start RMD on a monthly basis in January. Have done Roth conversions the last 4 years and presently draw from Roth and taxable, next year it will be all three plus my pension and SS. Will not burn anything to zero as I have a younger wife.

MikeG62
Posts: 2298
Joined: Tue Nov 15, 2016 3:20 pm
Location: New Jersey

Re: Spending Taxable to Zero during Retirement

Post by MikeG62 » Fri Nov 17, 2017 4:07 pm

mptfan wrote:
Fri Nov 17, 2017 3:49 pm
OffGridder wrote:
Fri Nov 17, 2017 3:18 pm
I know the general guideline is to burn down your taxable first and then tap the tax deferred and Roth last.
There is no such general guideline. This quote from the article cited above is instructive...

For most retirees, the tax efficient liquidation of a retirement portfolio requires coordinating between both taxable brokerage accounts and pre-tax retirement accounts like an IRA or 401(k).
+1
Real Knowledge Comes Only From Experience

User avatar
GerryL
Posts: 2596
Joined: Fri Sep 20, 2013 11:40 pm

Re: Spending Taxable to Zero during Retirement

Post by GerryL » Fri Nov 17, 2017 4:13 pm

I think the flexibility of having different types of accounts to draw from in retirement is a definite plus. If you need more in a given year than your RMD, it's good to have the option of pulling funds out of a Roth or a taxable account. Also, in the unhappy event of down years, the taxable account might offer options for tax-loss harvesting.

I have no plans to deplete my taxable account. In fact, once I start SS (next year) I will probably resume reinvesting dividends and will likely invest some of my RMD each year in the taxable account.

Topic Author
OffGridder
Posts: 51
Joined: Thu Jul 23, 2015 8:03 am
Location: Eastern WA.

Re: Spending Taxable to Zero during Retirement

Post by OffGridder » Fri Nov 17, 2017 4:54 pm

Thank you for your replies thus far. Somehow I seemed to have left the impression that I am spending down my taxable account in isolation from my tax advantage accounts. As I stated in my original post I am using withdawals from my taxable for both expenses and income tax on partial Roth conversions. The amount of my conversions are about the same as my withdraws from taxable. At my current burn rate, I will completely delete my taxable by age 70 when SS and RMDs kick in. So I will have SS , RMDs and Roth to pull from. I only will need SS and part of the RMDs to live on. I could tap the Roth when needed to keep the income tax bill low.

The alternate plan would be to divert some of the Roth conversion funds to expenditures. This would extend the life of my taxable account, at the expense of having as large of a Roth as I will have if I continue my current conversion rate. So in my case the concession required to maintain a significant taxable investment account would be a smaller Roth account. The tIRA will be the same with either path.
"Goodness is the only investment that never fails." | H.D. Thoreau

User avatar
ruralavalon
Posts: 17079
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: Spending Taxable to Zero during Retirement

Post by ruralavalon » Fri Nov 17, 2017 5:16 pm

OffGridder wrote:
Fri Nov 17, 2017 3:18 pm
Retired 2 years ago at age 58. So far it has been great.

I am burning down my taxable brokerage account first. The funds are being used for expenses plus income tax on Roth conversions between now and age 70 when I will take SS.

I know the general guideline is to burn down your taxable first and then tap the tax deferred and Roth last. My question to the retirees on the forum is, are you actually burning your taxable to zero or will you maintain some minimum amount in taxable through out retirement? [emphasis added] I mean beyond the checking account you use to pay bills. My plan has been to burn down my taxable to the level of my cash reserves, and keep that amount in a money market, CDs and I-Bonds. I am conservative, so in my case that is 2 years of expenses. I guess, I could keep those in tax protected space too, probably the Roth. I am married, so it will probably be easier and quicker for my spouse to access the cash reserves in a joint taxable account if I pass first. What do you all do or plan to do?

Thanks,
Dave
I am 72 and retired. Required Minimum Distributions from my rollover IRA have started, and along with Social Security cover our expected living expenses. So we will probably not draw any more from the joint taxable account absent some unexpected change in our living expenses.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

User avatar
Artsdoctor
Posts: 4186
Joined: Thu Jun 28, 2012 3:09 pm
Location: Los Angeles, CA

Re: Spending Taxable to Zero during Retirement

Post by Artsdoctor » Fri Nov 17, 2017 5:25 pm

OffGridder wrote:
Fri Nov 17, 2017 4:54 pm
Thank you for your replies thus far. Somehow I seemed to have left the impression that I am spending down my taxable account in isolation from my tax advantage accounts. As I stated in my original post I am using withdawals from my taxable for both expenses and income tax on partial Roth conversions. The amount of my conversions are about the same as my withdraws from taxable. At my current burn rate, I will completely delete my taxable by age 70 when SS and RMDs kick in. So I will have SS , RMDs and Roth to pull from. I only will need SS and part of the RMDs to live on. I could tap the Roth when needed to keep the income tax bill low.

The alternate plan would be to divert some of the Roth conversion funds to expenditures. This would extend the life of my taxable account, at the expense of having as large of a Roth as I will have if I continue my current conversion rate. So in my case the concession required to maintain a significant taxable investment account would be a smaller Roth account. The tIRA will be the same with either path.
As others have mentioned, you might want to keep some reserve outside your tax-deferred account if you can. The idea would be to pick and choose which account you want to withdraw from, if not regularly than in an emergency. If you can keep that flexibility, you might avoid being in a position where you have to withdraw an extremely large (unanticipated) amount from your tax-deferred account, thereby increasing your marginal tax rate significantly.

mptfan
Posts: 5714
Joined: Mon Mar 05, 2007 9:58 am

Re: Spending Taxable to Zero during Retirement

Post by mptfan » Fri Nov 17, 2017 6:04 pm

OffGridder wrote:
Fri Nov 17, 2017 4:54 pm
Somehow I seemed to have left the impression that I am spending down my taxable account in isolation from my tax advantage accounts.
I did not form that impression.

DrGoogle2017
Posts: 2528
Joined: Mon Aug 14, 2017 12:31 pm

Re: Spending Taxable to Zero during Retirement

Post by DrGoogle2017 » Fri Nov 17, 2017 6:13 pm

I don’t plan to spend them all down.

ThrustVectoring
Posts: 769
Joined: Wed Jul 12, 2017 2:51 pm

Re: Spending Taxable to Zero during Retirement

Post by ThrustVectoring » Fri Nov 17, 2017 6:20 pm

The step-up in basis might be worthwhile if you have significant unrealized capital gains and are doing estate planning. Suppose you're in the 15% bracket for capital gains, your tax basis is zero, and you're deciding between spending $1000 either through selling your taxable portfolio or withdrawing from a Roth IRA. The taxable account equivalent is selling $1176, paying the 15% tax bill from the proceeds. If you died the day after you sold, the choice is between $1176 in cash vs $1000 in an inherited Roth IRA.

I'm not too sure about how much the tax advantage of an inherited Roth IRA is, but it's probably less than the forgone step-up in basis.
Current portfolio: 60% VTI / 40% VXUS

User avatar
KlingKlang
Posts: 848
Joined: Wed Oct 16, 2013 3:26 pm

Re: Spending Taxable to Zero during Retirement

Post by KlingKlang » Fri Nov 17, 2017 6:54 pm

We are currently only spending (a little) from after tax accounts in order to qualify for maximum ACA benefits. We are actually adding small amounts to our tIRAs and Roth IRAs from my wife's earnings to manage the ACA situation. Once we are both on Medicare I anticipate starting to take significant withdrawals from our tIRA accounts and actually increasing our after tax accounts.

randomguy
Posts: 8519
Joined: Wed Sep 17, 2014 9:00 am

Re: Spending Taxable to Zero during Retirement

Post by randomguy » Fri Nov 17, 2017 7:12 pm

ThrustVectoring wrote:
Fri Nov 17, 2017 6:20 pm
The step-up in basis might be worthwhile if you have significant unrealized capital gains and are doing estate planning. Suppose you're in the 15% bracket for capital gains, your tax basis is zero, and you're deciding between spending $1000 either through selling your taxable portfolio or withdrawing from a Roth IRA. The taxable account equivalent is selling $1176, paying the 15% tax bill from the proceeds. If you died the day after you sold, the choice is between $1176 in cash vs $1000 in an inherited Roth IRA.

I'm not too sure about how much the tax advantage of an inherited Roth IRA is, but it's probably less than the forgone step-up in basis.
It depends on what the heirs do with the money and their tax situation. The people who are paying 34%+ on LTGC would much rather get the ROTH. People paying 0% might prefer taxable. I know I would take the ROTH any day of the week. Having spendable money that doesn't show up as income is incredibly useful for tax purposes.

User avatar
Svensk Anga
Posts: 628
Joined: Sun Dec 23, 2012 5:16 pm

Re: Spending Taxable to Zero during Retirement

Post by Svensk Anga » Fri Nov 17, 2017 9:51 pm

My situation is very much like yours. I plan to spend taxable down to nothing by my late sixties. My ideal case may be to draw on a HELOC for age 68 and 69 expenses, to be paid off when RMDs are rolling in, in excess of need. Barring that, I see no great harm in taking some from tIRA before it's required if need be. My original plan was to stretch taxable to age 70, but it really isn't quite big enough and I realized we would be short changing ourselves in our early retirement years. Then post-70, we would likely have income in excess of needs.

I do not see any need to keep two years of expenses in taxable. It's not like you will be laid off from retirement. If you run into unexpected expenses, just draw on either tIRA or Roth as tax optimization dictates.

duckcalldan
Posts: 169
Joined: Tue Feb 12, 2008 9:55 pm
Location: City of Destiny, WA

Re: Spending Taxable to Zero during Retirement

Post by duckcalldan » Fri Nov 17, 2017 10:00 pm

This may be implied, but are you using a donor advised fund for your giving? We are in a similar situation, early 50s and living off our taxable accounts until SS and RMDs. Besides using our taxable assets to pay for Roth conversions, we are donating highly appreciated stock to a Fidelity DAF for nearly all of our charitable giving. At a 3% WR, we are in no risk of outspending our taxable funds, and this has enabled us to be more generous with our giving than when we were giving from my paycheck.

User avatar
Peter Foley
Posts: 5006
Joined: Fri Nov 23, 2007 10:34 am
Location: Lake Wobegon

Re: Spending Taxable to Zero during Retirement

Post by Peter Foley » Fri Nov 17, 2017 10:10 pm

Gerry L wrote:
I think the flexibility of having different types of accounts to draw from in retirement is a definite plus.
I agree. We currently have about 4 year's worth of expenses in taxable and have spent down at least that many years worth of expenses since we retired 5+ years ago. We always fill up the 15% tax bracket with Roth conversions or IRA withdrawals and will continue to do so.

While taxable accounts can be used to cover expenses we have also used our account to donate appreciated shares of stock to a Donor Advised Fund. Almost all of our charitable contributions have been via a DAF rather than cash since we retired.

User avatar
dwickenh
Posts: 1789
Joined: Sun Jan 04, 2015 9:45 pm
Location: Illinois

Re: Spending Taxable to Zero during Retirement

Post by dwickenh » Fri Nov 17, 2017 10:26 pm

Retired 1 1/2 years and living off my small pension and taxable account. I will do roth conversions as possible without losing ACA subsidies. I intend to live off the taxable account to FRA of 66 and then draw SS which will take the pressure off of my taxable account. I will draw from taxable and rollover IRA after 66 to stay in the optimum tax position for additional Roth conversions.

I do not intend to exhaust my taxable account as I would consider that a detriment to flexibility in retirement income withdrawals.

My 2 cents worth,

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

ThrustVectoring
Posts: 769
Joined: Wed Jul 12, 2017 2:51 pm

Re: Spending Taxable to Zero during Retirement

Post by ThrustVectoring » Fri Nov 17, 2017 10:40 pm

randomguy wrote:
Fri Nov 17, 2017 7:12 pm
ThrustVectoring wrote:
Fri Nov 17, 2017 6:20 pm
The step-up in basis might be worthwhile if you have significant unrealized capital gains and are doing estate planning. Suppose you're in the 15% bracket for capital gains, your tax basis is zero, and you're deciding between spending $1000 either through selling your taxable portfolio or withdrawing from a Roth IRA. The taxable account equivalent is selling $1176, paying the 15% tax bill from the proceeds. If you died the day after you sold, the choice is between $1176 in cash vs $1000 in an inherited Roth IRA.

I'm not too sure about how much the tax advantage of an inherited Roth IRA is, but it's probably less than the forgone step-up in basis.
It depends on what the heirs do with the money and their tax situation. The people who are paying 34%+ on LTGC would much rather get the ROTH. People paying 0% might prefer taxable. I know I would take the ROTH any day of the week. Having spendable money that doesn't show up as income is incredibly useful for tax purposes.
Inherited assets don't count as income anyways, so $1000 of stock is worth $1000 to them after-tax regardless of their tax bracket and what price you purchased it at. It's $1000 of Roth that can grow tax free for a limited amount of time before getting liquidated, vs $1176 of typically tax-free inheritance. The latter is probably worth more.
Current portfolio: 60% VTI / 40% VXUS

randomguy
Posts: 8519
Joined: Wed Sep 17, 2014 9:00 am

Re: Spending Taxable to Zero during Retirement

Post by randomguy » Fri Nov 17, 2017 11:13 pm

ThrustVectoring wrote:
Fri Nov 17, 2017 10:40 pm
randomguy wrote:
Fri Nov 17, 2017 7:12 pm
ThrustVectoring wrote:
Fri Nov 17, 2017 6:20 pm
The step-up in basis might be worthwhile if you have significant unrealized capital gains and are doing estate planning. Suppose you're in the 15% bracket for capital gains, your tax basis is zero, and you're deciding between spending $1000 either through selling your taxable portfolio or withdrawing from a Roth IRA. The taxable account equivalent is selling $1176, paying the 15% tax bill from the proceeds. If you died the day after you sold, the choice is between $1176 in cash vs $1000 in an inherited Roth IRA.

I'm not too sure about how much the tax advantage of an inherited Roth IRA is, but it's probably less than the forgone step-up in basis.
It depends on what the heirs do with the money and their tax situation. The people who are paying 34%+ on LTGC would much rather get the ROTH. People paying 0% might prefer taxable. I know I would take the ROTH any day of the week. Having spendable money that doesn't show up as income is incredibly useful for tax purposes.
Inherited assets don't count as income anyways, so $1000 of stock is worth $1000 to them after-tax regardless of their tax bracket and what price you purchased it at. It's $1000 of Roth that can grow tax free for a limited amount of time before getting liquidated, vs $1176 of typically tax-free inheritance. The latter is probably worth more.
Yes but the money generated from the assets does. You inherit 2 million dollars and shove it in a some balanced portfolio and you are looking at 50k of income/year. That will generate some noticeable tax drag.

And yes it is for a limited time. But 30-60 years (you give it to your kid or grand kid) is a long enough period of time for the effects of tax drag and having to pay capital gains taxes to add up. RMDs are reduce some of the benefit but they start off pretty low for young people.

You would have to put in your exact assumptions (i.e. return, tax rates of heirs, ages,....) to see which one results in more money but in general I expect the ROTH to win. The tax drag of like .5% doesn't sound like much but it really adds up over 30+ years. The ability to rebalance easily and hold tax inefficient instruements is also a plus.

User avatar
Sheepdog
Posts: 5414
Joined: Tue Feb 27, 2007 3:05 pm
Location: Indiana, retired 1998 at age 65

Re: Spending Taxable to Zero during Retirement

Post by Sheepdog » Fri Nov 17, 2017 11:41 pm

I did spend down our taxable accounts the first 5 years in retirement (1998 to 2003) while converting 22% of our IRAs to Roth IRAs (4.5% each year to hold down future taxes) and purchasing I Bonds to increase tax deferred savings. This reduced our taxes in the ensuing years to very little (some years zero). We lived off of this savings plus SS only while increasing the value of our investments (from $640K to $1M )to keep up with our inflation. Over the years the investments have grown in value and the investment mix has morphed to 31% traditional IRA, 34% Roth IRA, 20% I bonds, 15% taxable of which about half is the present value of SPIAs purchased at age 80 and 81 and the rest consists of short term bond funds, cash and CDs
It worked for me. MultI millions in assets and large pensions might have been a different story, but I don't know. I love my results and would not change a thing.
Just because it isn't your fault doesn't mean it isn't your responsibility....Josh Reid Jones

WhiteMaxima
Posts: 2081
Joined: Thu May 19, 2016 5:04 pm

Re: Spending Taxable to Zero during Retirement

Post by WhiteMaxima » Mon Nov 20, 2017 11:52 am

In your Roth rollover period, if you can control your marginal rate under 15%. Then you long term gain tax is zero. If you can live with that income, that would be great. So I won't spend down aft-tax but use it as a tool to work with Roth rollover.

User avatar
Artsdoctor
Posts: 4186
Joined: Thu Jun 28, 2012 3:09 pm
Location: Los Angeles, CA

Re: Spending Taxable to Zero during Retirement

Post by Artsdoctor » Mon Nov 20, 2017 2:04 pm

Sheepdog wrote:
Fri Nov 17, 2017 11:41 pm
I did spend down our taxable accounts the first 5 years in retirement (1998 to 2003) while converting 22% of our IRAs to Roth IRAs (4.5% each year to hold down future taxes) and purchasing I Bonds to increase tax deferred savings. This reduced our taxes in the ensuing years to very little (some years zero). We lived off of this savings plus SS only while increasing the value of our investments (from $640K to $1M )to keep up with our inflation. Over the years the investments have grown in value and the investment mix has morphed to 31% traditional IRA, 34% Roth IRA, 20% I bonds, 15% taxable of which about half is the present value of SPIAs purchased at age 80 and 81 and the rest consists of short term bond funds, cash and CDs
It worked for me. MultI millions in assets and large pensions might have been a different story, but I don't know. I love my results and would not change a thing.
Nor would I. This sounds like an outstanding plan. And an inspiration. You did everything right!

SGM
Posts: 3062
Joined: Wed Mar 23, 2011 4:46 am

Re: Spending Taxable to Zero during Retirement

Post by SGM » Mon Nov 20, 2017 5:00 pm

We decided to convert all of our tIRAs to Roth accounts prior to taking delayed SS. We will spend only from taxable for many years. There may be a point when we spend from both Roth and taxable late in retirement. Most likely we will spend all or nearly all of the taxable account prior to taking from the Roth. We will continue to have lifetime income streams outside of the portfolio. So we will always have some income that could be taxed.

User avatar
Toons
Posts: 13426
Joined: Fri Nov 21, 2008 10:20 am
Location: Hills of Tennessee

Re: Spending Taxable to Zero during Retirement

Post by Toons » Mon Nov 20, 2017 5:39 pm

We are retired.
We have not "lit the match"(burned)
any of our taxable or tax deferred investments as of yet.
As of today No idea when that may start.





:mrgreen:
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

retiredjg
Posts: 38969
Joined: Thu Jan 10, 2008 12:56 pm

Re: Spending Taxable to Zero during Retirement

Post by retiredjg » Mon Nov 20, 2017 5:53 pm

Retired 10 years. My taxable account was small and I spent it within the first year or two (don't remember). I saw no reason to keep any in taxable. Now tapping the IRA each year and occasionally Roth IRA when I don't want to increase my taxable income any more for that year.

Will likely do Roth conversions the next few years, paying the tax from the IRA itself.

User avatar
PaddyMac
Posts: 1552
Joined: Fri Jul 09, 2010 10:29 pm

Re: Spending Taxable to Zero during Retirement

Post by PaddyMac » Tue Nov 21, 2017 3:40 pm

We plan to tap both taxable and 401ks when we hit 59.5. The plan is to withdraw from the SEPs/401k as much as will fill up the tax-free bracket and maybe a bit more in the 10-15% bracket, then top it off with taxable. But have no plans to spend only Taxable until it's depleted - that might mean our larger 401k withdrawals would kick us into a higher tax bracket later on when we are also drawing SS. I prefer to keep some flexibility.

mouses
Posts: 3938
Joined: Sat Oct 24, 2015 12:24 am

Re: Spending Taxable to Zero during Retirement

Post by mouses » Tue Nov 21, 2017 4:01 pm

OffGridder wrote:
Fri Nov 17, 2017 3:18 pm
Retired 2 years ago at age 58. So far it has been great.

I am burning down my taxable brokerage account first. The funds are being used for expenses plus income tax on Roth conversions between now and age 70 when I will take SS.

I know the general guideline is to burn down your taxable first and then tap the tax deferred and Roth last. My question to the retirees on the forum is, are you actually burning your taxable to zero or will you maintain some minimum amount in taxable through out retirement? I mean beyond the checking account you use to pay bills. My plan has been to burn down my taxable to the level of my cash reserves, and keep that amount in a money market, CDs and I-Bonds. I am conservative, so in my case that is 2 years of expenses. I guess, I could keep those in tax protected space too, probably the Roth. I am married, so it will probably be easier and quicker for my spouse to access the cash reserves in a joint taxable account if I pass first. What do you all do or plan to do?

Thanks,
Dave
I keep about a year's expenses in taxable. That is basically a cushion for large expenses, some of which are unforeseen, like I am currently burning through some of it for dental work. I can transfer enough to my checking account in a few mouse clicks.

Ron Scott
Posts: 1090
Joined: Tue Apr 05, 2016 5:38 am

Re: Spending Taxable to Zero during Retirement

Post by Ron Scott » Tue Nov 21, 2017 5:04 pm

61. Retired in May. Got a plan...

Goals: tax-efficient location and Roth conversions, take RMDs only from IRA, delay SS to max total gross over 17/18 years, never touch Roth, leave current NW intact.

Until 70: 75% of required spend to come from interest/dividends from munis and stock in taxable and a small frozen pension. Remaining 25% or more if desired from small taxable principal drawdown.

After 70: spend taxable interest/dividends, IRA RMDs, pension and SS. Let everything else compound.
Retirement is a game best played by those prepared for more volatility in the future than has been seen in the past. The solution is not to predict investment losses but to prepare for them.

User avatar
JDCarpenter
Posts: 1403
Joined: Tue Sep 09, 2014 2:42 pm

Re: Spending Taxable to Zero during Retirement

Post by JDCarpenter » Tue Nov 21, 2017 5:36 pm

It all depends upon when you retire, your pension-type income (if any), the weights of your deferred/roth/regular accounts....

We will exhaust the taxable accounts in the first three years of retirement.

But grossly skewed to deferred accounts, and no pension-type income. We will use the taxable accounts to live on and to fund roth conversions to the top of the 28% bracket under present tax law. (Just did the first conversion after getting a better handle on what our non-conversion income was with 1/2 year of working and some 1099 income). Roths presently are very light and we will continue to convert even after we begin living off of IRA monies so as to keep level tax rates once DW hits 70 (and to alleviate her hit after I kick off).

But, YMMV.

E.T.A.--not too worried about funding emergencies. Have a HELOC to tap, and after one of us hits 59.5, we have ability to freely tap the Roths if we need to avoid bigger IRA withdrawals. (Funded first roths with de minimus amounts 5 years ago to start the first five-year clock, and 59.5 erases the second one.)
Edit Signature

BigJohn
Posts: 1806
Joined: Wed Apr 02, 2014 11:27 pm

Re: Spending Taxable to Zero during Retirement

Post by BigJohn » Tue Nov 21, 2017 6:04 pm

Retired three years ago at age 58 and my plan to age 70 is much like yours. I'm a firm believer in having diverse investment types so I'm doing efficient Roth conversions with intent to be about 50/50 tIRA/Roth at age 70. This gives me flexibility to optimize giving and inheritance based on children tax brackets and charitable donations. I think (hope?) it also provides some flexibility to roll with the punches on tax law changes but no way to know for sure.

My projection is to have a bit of taxable left at age 70 but that's 9 years away and a lot can, and will, change in that time. So my advice would be to stay on your current path and reevaluate the most tax efficient path forward every year or two. I'd be amazed if you didn't make at least some tweaks to your plan over the next 10 years. :sharebeer

User avatar
grabiner
Advisory Board
Posts: 25629
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Spending Taxable to Zero during Retirement

Post by grabiner » Tue Nov 21, 2017 6:48 pm

Usually, it is better to spend taxable accounts before tax-advantaged accounts, because you keep the tax-deferred growth on the tax-advantaged accounts, while any further gains in the taxable account are immediately taxed (or you accept lower yields to hold municipal bonds). Taxes cost nothing in a Roth account, and cost a fixed percentage of a traditional account, regardless of when you withdraw. But in a taxable account, the fraction lost to taxes increases as you hold it longer, both because of taxes on dividends every year, and because of an increased capital gain when you eventually do sell (if the account holds stock).

However, that assumes that you are going to pay the tax anyway. If you have highly appreciated stock, and expect to leave a large inheritance, it may be better to keep that stock so that you can leave it to your heirs with a stepped-up basis, and spend down your tax-deferred accounts first. In this situation, you may lose less to taxes on the taxable account if you don't sell it.

Another issue for depleting accounts is charity. It is often better to make a Qualified Charitable Distribution from your IRA rather than donating from your taxable account, because the QCD is not counted in your gross income at all, while it would be counted if you took it as a distribution. This reduces the effect of AGI-based provisions in the tax code, such as the phase-in of Social Security taxation.
Wiki David Grabiner

User avatar
GerryL
Posts: 2596
Joined: Fri Sep 20, 2013 11:40 pm

Re: Spending Taxable to Zero during Retirement

Post by GerryL » Sun Dec 03, 2017 7:37 pm

[Just got back from out of town and am catching up on BH reading.]
Something just occurred to me reading some of the recent comments: If you are planning to spend down your taxable accounts before you start taking distributions from your IRA, that implies that you are also intending to spend (or donate) all of your RMDs. A few people have mentioned doing post-RMD Roth conversions, but what about simply reinvesting a portion of your RMDs that you don't need to live on? That would suggest retaining and feeding a taxable account until ... well, forever.

User avatar
badbreath
Posts: 927
Joined: Mon Jul 18, 2016 7:50 pm

Re: Spending Taxable to Zero during Retirement

Post by badbreath » Sun Dec 03, 2017 7:52 pm

My current plan is to work till 60 then retire. I would live off of my taxable which is much bigger than my 401k and would have a hard time spending down. Convert as much as I can of the IRAs and 401k to a Roth from 60 to 70 while in a lower tax bracket.
“While money can’t buy happiness, it certainly lets you choose your own form of misery.” Groucho Marx

technovelist
Posts: 2918
Joined: Wed Dec 30, 2009 9:02 pm
Contact:

Re: Spending Taxable to Zero during Retirement

Post by technovelist » Sun Dec 03, 2017 8:49 pm

The best solution is very complex due to the tax effects of all the different asset locations (taxable, ROTH, and Traditional deferred accounts), as well as pension and SS income.

And of course projecting taxes into the relatively distant future is fraught with other difficulties, but we have to start somewhere.

As for me, I'm probably going to annuitize a lot of my assets sometime in the next few years, in which case there won't be too much taxable to burn down gradually. But that depends to some extent on interest rates and tax brackets in the future.
In theory, theory and practice are identical. In practice, they often differ.

TG2
Posts: 197
Joined: Sat Nov 25, 2017 6:50 pm

Re: Spending Taxable to Zero during Retirement

Post by TG2 » Sun Dec 03, 2017 9:09 pm

I just retired at 58. My financial assets are under $1 million, but my expenses are pretty low so I don't need as much as some. I am doing a partial Roth conversion up to the limit of my 15% bracket for this year. I do not hit 59.5 until 2019 and do not want to either sell taxable or withdraw from my Roth, so will live off of savings for next year and will do another partial Roth conversion. For 2019-2021 I will likely take about $25-30,000 from an IRA each year for spending and again convert up to the 15% limit. I would rather leave the taxable accounts and the Roth IRA's alone to increase my available monies to spend later on while increasing my taxable income little or none for the year.

Claiming SS in January of my 62+ year and then efficiently managing withdrawals from IRA, Roth, and taxable should allow me to minimize tax liability (including taxation of SS benefits) while maintaining eligibility for other things such as health care subsidies or property tax exemptions if available. Not spending down my taxable accounts will give me greater flexibility later on, and if anything happens they will receive a stepped-up basis for heirs. Additionally, spending down or converting my IRA's will reduce RMD's later on and should save quite a bit that way too. The big key for me is having as much financial flexibility as possible and leaving all options on the table. Leaving taxable accounts alone as long as I can is part of that.

User avatar
siamond
Posts: 5128
Joined: Mon May 28, 2012 5:50 am

Re: Spending Taxable to Zero during Retirement

Post by siamond » Sun Dec 03, 2017 10:36 pm

I early retired a couple of years ago. My wife still works, but doesn't make much, so the bulk of our spending comes from our investment accounts. The current plan is indeed to use the taxable account until we're forced to do otherwise. While going through a Roth conversion process every year. More than half of our savings is in taxable though, so I don't expect that we'll deplete it any time soon. Still, my current simulations show a full depletion before we reach RMD time. I don't see why this would be a cause for concern.

Speculative qualifier: in the coming few years, we should pay very little federal taxes, thanks to the current tax regime on long-term capital gains, which is especially advantageous. I find quite hard to believe this will stay as favorable as it is, and nearly impossible to believe it would get any better. So I'd rather take advantage of it while we can.

kerplunk
Posts: 803
Joined: Sun Apr 17, 2011 9:58 pm

Re: Spending Taxable to Zero during Retirement

Post by kerplunk » Sun Dec 03, 2017 10:48 pm

livesoft wrote:
Fri Nov 17, 2017 3:49 pm
I am retired and not spending any of my tax-advantaged assets at the present time. I expect that my taxable assets will last quite a while and well past age 70.5 when RMDs might kick in for any remaining tax-deferred accounts that I have. In the meantime, it's Roth conversions every year.

So to answer your question: No, I don't think I will spend taxable to zero during retirement.
Can you elaborate on what “Roth conversions every year” means? What is the strategy? Convert tIRA until hitting the 15% bracket?

ENT Doc
Posts: 157
Joined: Sun Jan 22, 2017 9:14 pm

Re: Spending Taxable to Zero during Retirement

Post by ENT Doc » Sun Dec 03, 2017 11:54 pm

Retiring before 70 I'd live off dividends and capital gains from taxable, doing Roth conversions from TIRA to reduce RMDs. Could probably live off the taxable for some time, depending on how much you saved and your AA.

Retiring at or after 70, RMDs, social security, and income from taxable will determine what is optimal. The marginal decision is really based on your expense needs, what kind of inheritance you want to leave, and where your RMDs and social security take you. I'd probably convert additional IRA money to a Roth up to a certain tax bracket, then once done those live off taxable, especially if heirs are at a high tax bracket. Leave the Roth and remaining taxable to heirs.

TG2
Posts: 197
Joined: Sat Nov 25, 2017 6:50 pm

Re: Spending Taxable to Zero during Retirement

Post by TG2 » Mon Dec 04, 2017 12:14 am

Leave the Roth and remaining taxable to heirs.
Exactly. Both are far better to leave to heirs than T-IRA's. Inherited IRA's not only subject the beneficiary to RMD rules but they also have the income taxed at their ordinary rates in addition to everything else they make. Filling up my 0 and 10% brackets will cost far less than if they have to claim it at 15 or 25% or higher. Stepped-up basis is just another bonus. I consider my Roth money the most important money I have. Taxable is second. I'll spend down the tax-deferred as my first option and mix in the others as desired.

livesoft
Posts: 69586
Joined: Thu Mar 01, 2007 8:00 pm

Re: Spending Taxable to Zero during Retirement

Post by livesoft » Mon Dec 04, 2017 3:09 am

kerplunk wrote:
Sun Dec 03, 2017 10:48 pm
Can you elaborate on what “Roth conversions every year” means? What is the strategy? Convert tIRA until hitting the 15% bracket?
See this thread:
viewtopic.php?t=162635

We convert to top of 15% bracket the past few years.
Wiki This signature message sponsored by sscritic: Learn to fish.

User avatar
WoodSpinner
Posts: 1010
Joined: Mon Feb 27, 2017 1:15 pm

Re: Spending Taxable to Zero during Retirement

Post by WoodSpinner » Mon Dec 04, 2017 6:29 am

OffGridder wrote:
Fri Nov 17, 2017 4:54 pm
Thank you for your replies thus far. Somehow I seemed to have left the impression that I am spending down my taxable account in isolation from my tax advantage accounts. As I stated in my original post I am using withdawals from my taxable for both expenses and income tax on partial Roth conversions. The amount of my conversions are about the same as my withdraws from taxable. At my current burn rate, I will completely delete my taxable by age 70 when SS and RMDs kick in. So I will have SS , RMDs and Roth to pull from. I only will need SS and part of the RMDs to live on. I could tap the Roth when needed to keep the income tax bill low.

The alternate plan would be to divert some of the Roth conversion funds to expenditures. This would extend the life of my taxable account, at the expense of having as large of a Roth as I will have if I continue my current conversion rate. So in my case the concession required to maintain a significant taxable investment account would be a smaller Roth account. The tIRA will be the same with either path.
OffGridder,

I have a similar plan with conversions to the top of my tax bracket (25%).

May have to shift based on changes to tax law, will wait and see.

That said it’s a pretty good approach, diversifies your holdings and gives you options for spending, Emergency funds, and legacies.

8-)

Post Reply