Taxable Spending or Roth Conversions

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drzzzzz
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Joined: Sat Sep 22, 2012 9:56 pm

Taxable Spending or Roth Conversions

Post by drzzzzz » Thu Dec 07, 2017 2:43 pm

How does someone decide between using a taxable account to support themselves between early retirement years and before they are required to take minimum distributions from retirement accounts? We are married and our dividend and capital gains fill up the 0% bracket (over $70,000 a year). We have enough in taxable accounts to withdraw from them for the 8 years prior to hitting age 70.5 when we start taking social security and RMDs that will be around $90,000 from traditional retirement and IRA accounts (tax-deferred). Our tax bracket is now lower for a few years before we start taking social security and RMDs, so is it better to spend from taxable to support ourselves over the next 8 years and let the tax deferred accounts continue to grow (if that happens) and make Roth conversions during the next 8 years - or would it be better to start withdrawing from the tax deferred accounts now to support ourselves and make smaller or no Roth conversions while allowing the taxable accounts to grow. Our tax bracket now with either roth conversions or withdrawing from tax deferred will be similar to our tax bracket when RMDs start. So which is best to do - begin taking distributions now from tax deferred to spend or do roth conversions and use taxable assets? Normally tax deferred is better than paying taxes, but not sure in this situation.

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BolderBoy
Posts: 3924
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Location: Colorado

Re: Taxable Spending or Roth Conversions

Post by BolderBoy » Thu Dec 07, 2017 2:53 pm

drzzzzz wrote:
Thu Dec 07, 2017 2:43 pm
...so is it better to spend from taxable to support ourselves over the next 8 years and let the tax deferred accounts continue to grow (if that happens) and make Roth conversions during the next 8 years...
Yes, this is better. Especially the Roth conversions part.
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect

WhiteMaxima
Posts: 1178
Joined: Thu May 19, 2016 5:04 pm

Re: Taxable Spending or Roth Conversions

Post by WhiteMaxima » Thu Dec 07, 2017 3:06 pm

If you are 59 or older, you can start withdraw tax deferred combined with Roth conversion (below 15% tax bracket for zero long term cap gain from tax-able account). so between 59 to 70 you will have 11 years from reduce the fore-tax asset. Private pension will be started at 65 so need to be considered. In some sense, too much of tax deferred is not a good thing if you include RMD, SS and private pension.

smitcat
Posts: 1511
Joined: Mon Nov 07, 2016 10:51 am

Re: Taxable Spending or Roth Conversions

Post by smitcat » Thu Dec 07, 2017 3:25 pm

drzzzzz wrote:
Thu Dec 07, 2017 2:43 pm
How does someone decide between using a taxable account to support themselves between early retirement years and before they are required to take minimum distributions from retirement accounts? We are married and our dividend and capital gains fill up the 0% bracket (over $70,000 a year). We have enough in taxable accounts to withdraw from them for the 8 years prior to hitting age 70.5 when we start taking social security and RMDs that will be around $90,000 from traditional retirement and IRA accounts (tax-deferred). Our tax bracket is now lower for a few years before we start taking social security and RMDs, so is it better to spend from taxable to support ourselves over the next 8 years and let the tax deferred accounts continue to grow (if that happens) and make Roth conversions during the next 8 years - or would it be better to start withdrawing from the tax deferred accounts now to support ourselves and make smaller or no Roth conversions while allowing the taxable accounts to grow. Our tax bracket now with either roth conversions or withdrawing from tax deferred will be similar to our tax bracket when RMDs start. So which is best to do - begin taking distributions now from tax deferred to spend or do roth conversions and use taxable assets? Normally tax deferred is better than paying taxes, but not sure in this situation.
"so is it better to spend from taxable to support ourselves over the next 8 years and let the tax deferred accounts continue to grow (if that happens) and make Roth conversions during the next 8 years - or would it be better to start withdrawing from the tax deferred accounts now to support ourselves and make smaller or no Roth conversions while allowing the taxable accounts to grow"

We use the RPM spreadsheet calculator to evaluate that option and others for both total growth and tax affects over time - its not what you have its what you can spend after taxes.
You can then vary that model to see what happens with things like:
- higher or lower returns
- ages of SS
- age(s) of demise
- and value of inheritance if that applies

aristotelian
Posts: 4223
Joined: Wed Jan 11, 2017 8:05 pm

Re: Taxable Spending or Roth Conversions

Post by aristotelian » Thu Dec 07, 2017 3:26 pm

There are good arguments on both sides. Selling taxable generally gives you the biggest immediate gains (assuming you are going from 15% capital gains to 0). However, if you let the funds stay in Roth, there is some upside of long term growth. When in doubt, do some of each.

CnC
Posts: 528
Joined: Thu May 11, 2017 12:41 pm

Re: Taxable Spending or Roth Conversions

Post by CnC » Thu Dec 07, 2017 4:38 pm

Here is my plan keep living off of taxable keeping it at the maximum to not pay capital gains.


If you have headroom between your total expenses and the top of 0% capital gains tax return roth convert that much.


Then a few years pack as much into Roth conversions as you possibly can and stay below say the 28% or 33% based on what you think your total taxes with RMD's will be.

The advantage of this method is that you pay no taxes all the regular years because capital gains isn't taxed if you are below the 25% bracket. So lots of years of no taxes is nice.

But don't do that forever because RMDs will hammer you so condensing a few years of living off of tira and converting maximum to Roth will be save you considerable tax implications once you are boosting your income floor with Social Security and RMD's that will force you into higher tax brackets requiring you to pay capital gains.

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