"Where Do IRAs Fit in Your Retirement Distribution Plan?"

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Taylor Larimore
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"Where Do IRAs Fit in Your Retirement Distribution Plan?"

Post by Taylor Larimore » Wed Feb 28, 2018 3:21 pm

Bogleheads:

This may be the best article I have read on the important subject of taking withdrawals from multiple accounts:

Where Do IRAs Fit in Your Retirement Distribution Plan?

Thank you, Christine!

Best wishes
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

Larry2623
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Re: "Where Do IRAs Fit in Your Retirement Distribution Plan?"

Post by Larry2623 » Wed Feb 28, 2018 3:38 pm

I think a more balanced approach is better...keep my income in the 12% bracket! At least convert to roth ira to try and bring down balances before RMDS kick in

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willthrill81
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Re: "Where Do IRAs Fit in Your Retirement Distribution Plan?"

Post by willthrill81 » Wed Feb 28, 2018 4:24 pm

She's just recommending the standard advice: take your RMDS, then withdraw from taxable, and then from IRAs.

I anticipate retiring long before RMDs are an issue, and I plan on withdrawing and spending (recall that you do not have to spend RMDs) more than my RMDs anyway once they kick in. My plan is to withdraw from tax-deferred accounts until I max out the 12% bracket, then take any excess withdrawals from Roth. However, I don't anticipate that our spending needs will ever push us out of the 12% bracket apart from some aberrant situation. Consequently, we'll make Roth conversions up to the top of the 12% bracket every year that we can, and we'll probably hang on to the Roth accounts until our tax-deferred accounts are exhausted or we die, and our daughter will probably inherit millions tax-free.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Doc
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Re: "Where Do IRAs Fit in Your Retirement Distribution Plan?"

Post by Doc » Wed Feb 28, 2018 5:51 pm

willthrill81 wrote:
Wed Feb 28, 2018 4:24 pm
However, I don't anticipate that our spending needs will ever push us out of the 12% bracket apart from some aberrant situation.
Do you consider receiving Social Security benefits to be "some aberrant situation"? The phasein of taxation for Social Security benefits will make your effective marginal tax rate be 18 to 22% in the 12% bracket.

The first time doing your tax return after getting on Social Security can be a real shock. :(
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

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iceport
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Re: "Where Do IRAs Fit in Your Retirement Distribution Plan?"

Post by iceport » Wed Feb 28, 2018 6:10 pm

As willthrill81 alludes to, I was surprised the article didn't at least broach the subject of Roth conversions in low-income years to fill specific tax brackets. Christine Benz has written those articles, too.
"Discipline matters more than allocation.” ─William Bernstein

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willthrill81
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Re: "Where Do IRAs Fit in Your Retirement Distribution Plan?"

Post by willthrill81 » Wed Feb 28, 2018 6:23 pm

Doc wrote:
Wed Feb 28, 2018 5:51 pm
willthrill81 wrote:
Wed Feb 28, 2018 4:24 pm
However, I don't anticipate that our spending needs will ever push us out of the 12% bracket apart from some aberrant situation.
Do you consider receiving Social Security benefits to be "some aberrant situation"? The phasein of taxation for Social Security benefits will make your effective marginal tax rate be 18 to 22% in the 12% bracket.

The first time doing your tax return after getting on Social Security can be a real shock. :(
I plan to delay SS until age 70, which will likely be 15-20 years after I retire. That gap is so big that I choose to ignore SS altogether for planning purposes. Whatever I get from SS after taxes will be the cherry on the icing on the cake and will simply reduce our needed withdrawals.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: "Where Do IRAs Fit in Your Retirement Distribution Plan?"

Post by 02nz » Wed Feb 28, 2018 11:14 pm

The article isn't bad advice, but I think it might be refined to say that, even for those not yet impacted by RMDs, distributions from 401k's/traditional IRAs (not taxable accounts) should be taken first, to 1) fill up the standard deduction and possibly the 10 and 12% tax brackets, before they go back up; and 2) to reduce future RMDs and reduce the amount by which they cause SS benefits to be taxed.

After that, there's another opportunity the article misses:

"Relative to tax-deferred or tax-free assets, money in your taxable portfolio carries the highest tax costs. You'll pay ordinary income tax on income from taxable bonds and cash, and you'll also owe taxes on dividends and capital gains--year in and year out. When liquidating assets from your taxable accounts, start by selling assets with the highest cost basis first and then move on to those assets where your cost basis is lower (and your tax hit is higher)."

This isn't entirely incorrect, but for many retirees I think it's not necessarily the best advice. For many of them taxable assets should indeed be liquidated ahead of Roth balances (but not necessarily ahead of traditional balances), but a more significant factor than taxable accounts' ongoing tax costs from CG distributions and dividends is the opportunity to sell some of those holdings with zero tax on LTCG, if their marginal fed. tax rate is no higher than 12% and the gains don't push their income out of that range. In that instance contrary to the article's advice they may want to sell the lowest cost basis shares first, if the goal is to take advantage of the zero rate while taking less out (e.g., if they don't actually need the money at present).

In other words, I think the article is overstating taxable balances' "ongoing" tax costs (which can be minimized) and thus the benefit of liquidating them first, and overlooking the benefits of filling up the lower income tax buckets with distributions from traditional balances, especially before RMDs limit one's control over the amounts of those distributions and SS benefits kick in.

Does that seem sensible? I'm far away from retirement but trying to get smart on the various ways of optimizing the different pieces of retirement, esp. taxes. The interactions of the pieces is complex (I haven't even thrown ACA subsidies and Roth conversions into the mix) but that also creates opportunities!

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