Sequence of Withdrawal

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Sequence of Withdrawal

Post by AtlBoglehead »

I'm in my late 70's with a net worth of about 1.5 M, mostly ROTHS. I also have a fairly substantial 401K. So far we have lived comfortablely in retirement on our SS plus a small pension and the RMD from my traditional 401K. I think I am in the 22-24% marginal tax bracket. Now I need to make a few lump sum withdrawals to help my adult children with some legal and/or medical issues that hAve come up. I'LL probably be pulling out $20-30,000 gradually over the next yr or so to help them. It either has to come from the 401K, which is fully taxable to us now or to our children after we pass, OR from the ROTHS, which are not taxable now or later. I know you need more info for a perfect answer, but I don't have time to give more info so I'LL have to settle for general responses. In general, would you pull gradual lumps of this money from the less-tax-efficient 401K and go ahead and pay the taxes myself OR would you take it from the ROTHS which are neither taxable or in the future.? I do have plenty in cash or fixed income in both types of accounts. Alternatively, I only owe about $12,000 on my house, so I could pay that off, leave the retirement accts alone, and write a HELOC check for what we need. Then slowly pay that off over a few yrs with our cashflow. What would you do?
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Re: Sequence of Withdrawal

Post by bloom2708 »

Did you save the money to be an inheritance?

I would take out enough pay off the nuisance $12k mortgage asap. I would not use a HELOC when you have $1.5 million in retirement savings.

Since you have a majority in Roth IRAs, I would withdraw from one or both Roth IRAs.

Did you take your RMD for 2020? Or are you skipping it because of the Cares act?

On the flip side, if you want to leave the Roth IRAs to grow for an inheritance, take from the traditional side and set aside enough to pay the state tax. withhold enough to cover your marginal rate.

Seems like it won't really matter either way.
"We are here to provoke thoughtfulness, not agree with you." Unknown Boglehead
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Re: Sequence of Withdrawal

Post by sycamore »

+1 to what bloom2708, especially the key question about if the money in your 401k + IRA is intended (at least partly) to pass on as an inheritance. If so, meaning you truly don't the $20k or $30k for your own expenses, then giving now is a great and worthy idea. And don't bother with the HELOC idea.

At the 22% bracket, I'd say withdraw from the trad 401k.
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