Retirement Spending - which account?

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drzzzzz
Posts: 189
Joined: Sat Sep 22, 2012 9:56 pm

Retirement Spending - which account?

Post by drzzzzz » Tue Jul 10, 2018 9:23 pm

Confused about which account to use for retirement expenses. I am planning to retire next year at age 63 and delay taking social security until age 70. I have about 60% of my assets in tax-deferred accounts, 30% in taxable accounts, and 10% in roth accounts. I would like to do some Roth conversions since my income tax bracket will be lower, but am trying to figure out whether it is better to take money from taxable accounts to spend from years 63 to 70 when I will start social security and RMD's, or is it better to take money from the tax-deferred accounts (and pay taxes now) rather than later. I would also like to do ROTH conversions up to the 24% bracket, but not sure which account to tap for living expenses during those years. IS there a formula or approach that individuals use to make this decision? I am married and the spouse will be starting social security and RMD next year at age 70. The spouses RMD and social security will cover half of our living expenses.

AlwaysWannaLearn
Posts: 229
Joined: Mon May 28, 2018 8:37 pm

Re: Retirement Spending - which account?

Post by AlwaysWannaLearn » Tue Jul 10, 2018 9:30 pm

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Last edited by AlwaysWannaLearn on Thu Jul 19, 2018 6:00 pm, edited 1 time in total.

02nz
Posts: 450
Joined: Wed Feb 21, 2018 3:17 pm

Re: Retirement Spending - which account?

Post by 02nz » Tue Jul 10, 2018 9:55 pm

I think the OP's idea of taking money (both distributions and Roth conversions) from the tax-deferred accounts is very sound. Take advantage of the newly enlarged standard deduction and low (10 and 12%) tax brackets. I don't know if I'd do Roth conversions up to the to of the 24% bracket, but certainly up to 12%, and maybe higher depending on the size of your tax-deferred accounts and other income. This not only draws down your balance so you pay lower taxes overall on your distributions, but also lowers the amount of your SS benefits that might otherwise be subjected to income tax, if you waited to take the distributions until RMDs started.

This advice differs from the conventional wisdom (like the Vanguard link AlwaysWannaLearn provided), which says that after RMDs (which OP doesn't face yet) one should take taxable first, so that tax-advantaged accounts can continue to grow free from tax drag. But if your taxable investments are relatively tax-efficient (e.g. index funds), tax drag is not huge (and for many retirees LTCG is 0%), and there's a much bigger potential gain from filling in low-tax space before SS benefits and RDMs start.

OP may want to play with the calculator here: https://www.i-orp.com/GuarInc/index.html (although when I tried it just now it gave an error message).

Chip
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Joined: Wed Feb 21, 2007 4:57 am

Re: Retirement Spending - which account?

Post by Chip » Wed Jul 11, 2018 5:49 am

You have 30% of your assets in taxable accounts. If you spent only from taxable at a 4% withdrawal rate it would likely last you just over 7 years (7*4%=28%), which coincidentally will be the amount of time after you retire before RMDs and SS kick in. So conceivably you could spend only from taxable while maximizing your Roth conversions. This is the path I have taken for the last 17 years. Obviously, taking living expenses from your IRA will reduce the amount you are able to Roth-convert within a given tax bracket.

We don't have enough details about your particular situation to make specific recommendations. But here are some things to answer/consider:

What will your marginal tax rate be once you are receiving SS and RMDs?

What will your marginal tax rate be immediately after retirement?

What will the marginal tax rate of your heirs be after one/both of you pass away?

Do you have long term care insurance or will you self-fund? LTC expenses can result in very high medical deductions, reducing marginal tax rates.

If you convert to the top of the 24% bracket, what percentage of assets will you end up converting from IRA to Roth? It rarely makes sense to convert everything.

If you convert to the top of the 24% bracket you will also pay increased Medicare premiums due to IRMAA. For Part B alone you and your wife would each pay an additional $214/month over the base Part B charge. This can be considered an additional tax that you're paying. But it may cause you to pick an IRMAA breakpoint for a Roth conversion target rather than a federal tax bracket breakpoint.

Converting to the top of the 24% bracket will also subject you to the 3.8% NIIT (net investment income tax) on all taxable investment income.

You can start off living off the taxable account and converting as desired. You can always change that strategy.

If you're willing to provide more details perhaps we can make some recommendations on a strategy.

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David Jay
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Location: Michigan

Re: Retirement Spending - which account?

Post by David Jay » Wed Jul 11, 2018 8:03 am

02nz wrote:
Tue Jul 10, 2018 9:55 pm
I think the OP's idea of taking money (both distributions and Roth conversions) from the tax-deferred accounts is very sound. Take advantage of the newly enlarged standard deduction and low (10 and 12%) tax brackets. I don't know if I'd do Roth conversions up to the to of the 24% bracket, but certainly up to 12%, and maybe higher depending on the size of your tax-deferred accounts and other income. This not only draws down your balance so you pay lower taxes overall on your distributions, but also lowers the amount of your SS benefits that might otherwise be subjected to income tax, if you waited to take the distributions until RMDs started.
I spent a fair amount of time looking at this (I retire next year) and I now put much more weight on future RMD withdrawals in my considerations. Remember that RMD percentages go up every year. For example at age 85 your RMD is 7.1% of your (tax-deferred) balance. So if one doesn't aggressively withdraw from tax-deferred, one can easily find themselves being pushed into higher tax brackets.

I agree that both taking living expenses and doing Roth conversions from tax-deferred can be a sound choice based on the actual numbers.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

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