Help with Drawdown Strategy

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Topic Author
Rolyatroba
Posts: 228
Joined: Mon Apr 22, 2013 1:14 pm

Help with Drawdown Strategy

Post by Rolyatroba » Sat Jun 09, 2018 12:00 pm

Hi...we are retiring in about 2 years, and I am now devising our drawdown strategy. I've seen the conventional strategy of taking RMDs, then from taxable, then tax-deferred, then tax-free assets, as well as the alternative strategy that suggests first withdrawing from tax-deferred (to avoid tax bracket jumps in later years).

I've also modeled in i-ORP. With our situation i-ORP does specify to take from the traditional IRA and after-tax accounts first, and pay very large sums in taxes for the first 3 years or so. This leads to all funds ending up in a Roth IRA.

My concern is that in our after-tax account (~$750k) there is about $500k in cap gains, and with the i-ORP strategy we will be paying much higher taxes on those gains than we would if we deferred the IRA distributions, until the cap gains were gone.

Assuming about $30k* in income and $30k in deductions, I believe (and have modeled) that I can realize $80k in gains ($120k in sales), and pay zero in taxes (filing jointly). That gives us about $150k to live on, which is quite doable for us, and below i-ORP's max. annual disposable income.

With all that in mind, my instinct says to wait on the IRA distributions until all the cap gains are realized. I just haven't been able to corroborate that in i-ORP or any other modeling tool.

Any thoughts/advice on this would be appreciated.

*$15k of that will be tax-free rental cash flow, due to accum. disallowed losses.

livesoft
Posts: 69764
Joined: Thu Mar 01, 2007 8:00 pm

Re: Help with Drawdown Strategy

Post by livesoft » Sat Jun 09, 2018 12:03 pm

I believe i-ORP always draws down first the account that you told it will have the least returns or gains. Did you tell i-ORP that your tax-deferred account had the lowest expected return?
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Topic Author
Rolyatroba
Posts: 228
Joined: Mon Apr 22, 2013 1:14 pm

Re: Help with Drawdown Strategy

Post by Rolyatroba » Sat Jun 09, 2018 2:23 pm

Thanks for chiming in...I have the same AA (60% stocks) and the same return and dist. rate for all 3 account types.

Marginal tax rate of 28%, and cap gains at 20% (will be that or higher with all the tax-deferred withdrawals--i-ORP doesn't adjust this automatically based on taxable income).

Taxes go down significantly in ensuing years (low $20'sK), but forking out $454k in taxes in 4 years, not really knowing what the future holds, is very concerning.

Code: Select all

Age         RMD    TaxDef  AfterTax  RothIRA IRA2Roth  Income    Taxes  Spending 
060             0      310      269        0      310       29      128      169
061             0      321      285        0      321       23      132      175
062             0      332      239        0      280       17      128      181
063             0      243        0        0        8       17       66      187

bradpevans
Posts: 619
Joined: Sun Apr 08, 2018 1:09 pm

Re: Help with Drawdown Strategy

Post by bradpevans » Sat Jun 09, 2018 3:17 pm

See here: https://www.gocurrycracker.com/never-pay-taxes-again/
re 0% LTCG

If you can pull this off, it basically turns your After-Tax (Brokerage) account into a Roth
(you paid taxes before it was invested, and you may able to withdraw gains with no taxes)

Depending on the other parts of your income, you may have to option to tax *gain* harvest,
recording profits (without tax impact), then buying right back at the 'stepped-up' basis

At some point (SS + pension + RMD), the 0% LTCG may not be do-able, so then you
have 15% LTCG but on a smaller gain since you stepped up the basis.

gneeby
Posts: 59
Joined: Wed Jul 02, 2008 1:49 pm

Re: Help with Drawdown Strategy

Post by gneeby » Sun Jun 10, 2018 1:51 pm

livesoft wrote:
Sat Jun 09, 2018 12:03 pm
I believe i-ORP always draws down first the account that you told it will have the least returns or gains. Did you tell i-ORP that your tax-deferred account had the lowest expected return?
ORP is way more subtle than this. ORP withdrawals reflect both savings account rates of return and the prevailing tax situation.

ORP's web page encourages users with issues such as this to email in your questions.

Topic Author
Rolyatroba
Posts: 228
Joined: Mon Apr 22, 2013 1:14 pm

Re: Help with Drawdown Strategy

Post by Rolyatroba » Mon Jun 11, 2018 10:02 am

Ok...I think I've modeled a way to analyze this conundrum; if anyone can chime in on the efficacy and findings, that would be great.

What I did was run 2 different i-ORP scenarios:

1 - Follow i-ORP as is, starting at age 60 with numbers that I have been using. The result is that max. annual spending is $155k; first few rows of flows are below.

Code: Select all

Age         RMD    TaxDef  AfterTax  RothIRA IRA2Roth  Income    Taxes  Spending
060             0      310      260        0      310       29      135      155
061             0      321      274        0      321       23      139      159
062             0      332      260        0      308       17      138      163
063             0      244        0        0       28       17       66      167
064             0      184        0       16        0       17       46      171
065             0      187        0       18        0       17       46      175
066             0      190        0       20        0       17       47      179
067             0       68        0       88        0       48       20      184
068             0       69        0       91        0       48       20      188
069             0       70        0       95        0       49       21      193
070             0       72        0       98        0       49       21      198
071             0       74        0      100        0       50       21      203
072             0       76        0      104        0       50       22      208
2 - From age 60-62 sell after tax funds with $80k in gains per year ($250k in proceeds, $0 tax bill), then place leftover funds* (~$112k/yr) in after-tax cash (to simplify). Finally use new numbers with i-ORP starting 3 years later than the above scenario, with after-tax balance of $336k ($112k *3, $336k basis).

The result is a small increase in max. annual spending, to $156k per year.

Code: Select all

Age         RMD    TaxDef  AfterTax  RothIRA IRA2Roth AftxTrns  Income    Taxes  Spending
063             0      344      246        0      344        0       21      100      168
064             0      354      119        0      216        0       17      101      172
065             0      359        0        0       97        0       17      103      176
066             0      365        0        0       97        0       17      104      181
067             0      344        0        0      100        0       48      106      185
068             0      350        0        0      100        0       48      108      190
069             0      306        0        0       66        0       49       93      195
070             2       75        0       97        0        0       49       22      200
071             3       78        0       99        0        0       50       22      205
072             3       79        0      103        0        0       50       22      210
Further, a few Monte Carlo runs show the 2nd scenario having a little higher mean & median income, and somewhat better std. deviations/worst cases.

Being that the two scenarios are so close in results, it does give me confidence that i-ORP is suggesting a good strategy with the original scenario. That said, I will likely go with the latter plan, since I don't like paying taxes and i-ORP is ok with it that way too.

Any contraindications would be welcomed.

*$250k plus $17k in other income, minus the $155k spent as specified in first model, = $112k

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