Withdrawal Sequence from Savings

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CKMAN
Posts: 26
Joined: Sat Mar 11, 2023 7:31 am

Withdrawal Sequence from Savings

Post by CKMAN »

I would like your advice on how to start withdrawing distributions from my savings once I retire in about three years, at age 63.

My situation:
1. Fixed Pension $60,000 yearly (starts when I retire at age 63, cannot be delayed)
2. Cash invested $650,000 (Stock 50%; Bonds 15%; Short term 35%)
3. IRA $1,200,000 (70% stock; 30% Bond)
4. Roth $500,000 (90% stock;10 % Bond)
5. HSA $125,000
6. Waiting for SS and start taking it at 70 yrs old ( approximately $53,000/ year)
7. Need about $110,000 per (year before tax) and less once get older.
8. Once retired, I am moving out to Portugal or Spain and coming back at 65 (or later) to qualify for Medicare.

My thoughts are to start withdrawing from IRA to reduce future RMD and associated taxes.
Then, if I need to, I can go to CASH, HSA, and finally, ROTH.

Appreciate your thoughts. Thank you.
Last edited by CKMAN on Wed Oct 30, 2024 12:26 pm, edited 2 times in total.
SnowBog
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Joined: Fri Dec 21, 2018 10:21 pm

Re: Withdrawal Sequence from Savings

Post by SnowBog »

To some extent, it's a tax optimization question, although both current year and long term.

If your RMDs are going to kick out more money then needed - and thus force you to pay more taxes than needed - your plan to lower them first usually makes sense. Whether you spend that money or do Roth conversions depend on if you have an RMD problem - and how big it is (aka your long term taxes might benefit from getting your Traditional IRA lower by more than what you'd spend in the next few years).

But you also have to balance your current year taxes, plus any impacts to things like ACA subsidies, IRMAA, etc.

In other words, it might not be linear. You might end up pulling some from IRA, and then to avoid going into higher tax brackets or cliffs with ACA/etc., pull others from taxable, Roth, cash as needed.

Conceptually, the best outcomes are generally when you can maintain consistent tax brackets throughout retirement. Given our "progressive" tax system, if you have high taxable income in only some years an ever larger % of that is lost to taxes. If you can "spread out" that income/taxes keeping more years in a lower tax bracket, that's usually the best outcome. But unfortunately, there isn't a one sized fits all approach. You'll have to look at your numbers and your situation...
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retired@50
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Joined: Tue Oct 01, 2019 2:36 pm
Location: Living in the U.S.A.

Re: Withdrawal Sequence from Savings

Post by retired@50 »

CKMAN wrote: Wed Oct 30, 2024 11:07 am I would like your advice on how to start withdrawing distributions from my savings once I retire in about three years, at age 63.

My situation:
1. Fixed Pension $60,000 yearly (I am lucky I know)
2. Cash invested $650,000 (Stock 50%; Bonds 15%; Short term 35%)
3. IRA $1,200,000 (70% stock; 30% Bond)
4. Roth $500,000 (80% stock;10 % Bond)
5. HSA $125,000
6. Waiting for SS and start taking it at 70 yrs old ( approximately $53,000/ year)
7. Need about $110,000 per (year before tax) and less once get older.

My thoughts are to start withdrawing from IRA to reduce future RMD and associated taxes.
Then, if I need to, I can go to CASH, HSA, and finally, ROTH.

Appreciate your thoughts. Thank you.
To whatever extent possible (without paying too much in income or capital gains taxes), I'd relocate the assets using the tax efficient fund placement wiki page as a guide.

Regards,
"All of us would be better investors if we just made fewer decisions." - Daniel Kahneman
HomeStretch
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Joined: Thu Dec 27, 2018 2:06 pm

Re: Withdrawal Sequence from Savings

Post by HomeStretch »

If you will be using ACA healthcare coverage in pre-Medicare retirement, for those years you may also want to manage your ACA MAGI if you want to be eligible for and receive premium tax credits and possibly cost sharing reductions.
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telemark
Posts: 3514
Joined: Sat Aug 11, 2012 6:35 am

Re: Withdrawal Sequence from Savings

Post by telemark »

Rather than withdraw directly from the IRA, I would do Roth conversions while spending down the taxable account. I can say this with some confidence because it is exactly what I did. The reason is simple: given a choice between having money in taxable vs having money in Roth, I always go for the Roth.

As already mentioned, you should also consider keeping your MAGI low to qualify for ACA subsidies, but your pension income doesn't leave much room for that: the upper limit is 4 times FPL, which for 2024 works out to around $60,000.
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retired@50
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Location: Living in the U.S.A.

Re: Withdrawal Sequence from Savings

Post by retired@50 »

CKMAN wrote: Wed Oct 30, 2024 11:07 am My situation:
1. Fixed Pension $60,000 yearly (I am lucky I know)
2. Cash invested $650,000 (Stock 50%; Bonds 15%; Short term 35%) <- This account could be all stock index funds - presuming you can sell the bond investment(s) with minimal income or capital gains taxes.
3. IRA $1,200,000 (70% stock; 30% Bond) <- This account could be 75% bonds, 25% stock which would slow the growth and reduce the severity of your future RMD problems.
4. Roth $500,000 (80% stock;10 % Bond) <- This account should be all stock index funds.
5. HSA $125,000 <- This account should be all stock index funds.
6. Waiting for SS and start taking it at 70 yrs old ( approximately $53,000/ year)
7. Need about $110,000 per (year before tax) and less once get older.
For an idea of what your portfolio might look like if you follow the guidance in the wiki page I referred to, see the remarks above in blue.

If my math is correct, you're holding around $735,000 in fixed income, plus however much is inside the HSA. All of these fixed income investments could be inside your T-IRA with the remainder in stock index funds. This doesn't change your asset allocation, just the asset location.

This will slow down the growth of the T-IRA, and take the bond and cash holdings income away from your taxable account and replace it with a smaller amount of qualified dividend income. This will almost certainly reduce your income tax bill.

Regards,
"All of us would be better investors if we just made fewer decisions." - Daniel Kahneman
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retiredjg
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Re: Withdrawal Sequence from Savings

Post by retiredjg »

Where you should spend from probably depends most on whether you will be using the ACA for health insurance and, if yes, how interested you are in getting subsidies.
HomeStretch
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Joined: Thu Dec 27, 2018 2:06 pm

Re: Withdrawal Sequence from Savings

Post by HomeStretch »

Are you single or married?

When will you claim the pension - age 63 or can you delay until after you move off ACA healthcare (assuming you even will need to utilize it)?

If you are able to delay the pension beyond age 63, does the pension benefit increase?
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