Withdraw from TIRA or Roth, it doesn't matter?

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jeffyscott
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Withdraw from TIRA or Roth, it doesn't matter?

Post by jeffyscott » Fri Jun 08, 2018 7:06 am

I have always read that it's best leave the Roth as long as possible and withdraw from TIRA first (at least as long as the withdrawals will not push you into a higher tax bracket). However, if I plan do conversions to the top of the 12% bracket each year, it seems that it does not actually matter where I take withdrawals from, unless I am missing something?

For example, if I withdraw $25,000 from TIRA and convert $25,000 TIRA to Roth that is essentially no different than withdrawing $25,000 from Roth and converting $50,000 in TIRA to Roth. In both cases I have $25,000 to spend and pay income taxes on $50,000. In both cases I also end up with $50,000 less in TIRA and $25,000 more in Roth.
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Re: Withdraw from TIRA or Roth, it doesn't matter?

Post by niceguy7376 » Fri Jun 08, 2018 7:37 am

How old are you right now?
What you need to consider is what the RMDs will be when you reach that age (70.5)

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Re: Withdraw from TIRA or Roth, it doesn't matter?

Post by retiredjg » Fri Jun 08, 2018 9:03 am

In the example as given, it does not seem to matter. But sometimes states have different ways of taxing different incomes so I"d be sure to check that out first. I suspect there are other examples of "all things not being equal", but can't think of any right now. Interested in seeing what others think up.

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Re: Withdraw from TIRA or Roth, it doesn't matter?

Post by jeffyscott » Fri Jun 08, 2018 9:49 am

No RMDs, in fact I am not even at the magical age 59.5 yet. But being underage is not an issue as the withdrawals will actually come from a 457 (TIRA equivalent, except no minimum age as I am retired) or Roth contributions. Our Roth IRAs were established much more than 5 years ago (before 2000) and would not be withdrawing more than our contributions (prior to age 59.5).
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Re: Withdraw from TIRA or Roth, it doesn't matter?

Post by jeffyscott » Fri Jun 08, 2018 10:13 am

Doesn't appear to be any special tax treatment in WI related to distributions from IRAs, etc, except an exclusion of $5000, if you are at least 65 and income under $15K/30K.

The only other thing I found was from 2009 indicating that the $100K income limit for Roth conversions remained, but this was changed in 2010.

They do have one odd provision, exemption for government interest can pass through from IRAs, but the recordkeeping would be a nightmare. I once thought about keeping these records but gave up:

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Re: Withdraw from TIRA or Roth, it doesn't matter?

Post by DSInvestor » Fri Jun 08, 2018 10:32 am

Given that you’re younger than 59.5, there is a difference between TIRA/457. I believe one can withdraw from 457b before age 59.5 without penalty. Withdrawal from TIRA before 59.5 is subject to early withdrawal penalty. I think OP is aware of this so this is for the benefit of other readers.

Roth conversions are not subject to penalty even if done before 59.5.

Roth IRA withdrawals can be tax free and penalty free before 59.5 assuming you meet the requirements (e.g. Roth IRA withdrawal is less than your Roth IRA contribution basis).
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Re: Withdraw from TIRA or Roth, it doesn't matter?

Post by jeffyscott » Fri Jun 08, 2018 10:45 am

DSInvestor wrote:
Fri Jun 08, 2018 10:32 am
Given that you’re younger than 59.5, there is a difference between TIRA/457. I believe one can withdraw from 457b before age 59.5 without penalty. Withdrawal from TIRA before 59.5 is subject to early withdrawal penalty. I think OP is aware of this so this is for the benefit of other readers.
Yes, that's why I initially left age and called my 457 withdrawals TIRA, in order to avoid any confusion and make it more generalized. I had not thought about the RMD aspect, for older people. A 457(b) does allow withdrawal at any age, provided you have terminated employment with the entity that provides the 457.

The general case for IRA, 401K or 403(b), where it seems to make no difference, would be someone between 59.5 and 70.5.
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Re: Withdraw from TIRA or Roth, it doesn't matter?

Post by House Blend » Fri Jun 08, 2018 10:49 am

Generally, you should Roth convert only if you believe that your current tax rate is low compared to some future tax rate you will face.

Also, you should withdraw from any flavor of IRA only if you are forced (RMD), or you need the money for current expenses.

It's true that both circumstances could be in play during the same tax year. As you point out, covering expenses from the Roth or tax-deferred in that situation can put you in more or less the same place financially. One advantage I do see for Roth-withdrawing is that it is harder to hit the top of a tax bracket these days, now that recharacterization is not an option.

Ex. If early in the year you forsee $X of space in the 12% bracket, but are unsure how much you will need to draw from an IRA in order to cover expenses, you might as well convert $X now, and plan on tapping the Roth as needed.

(Of course if you are of RMD age, that has to come out first. So it should have been part of the calculation of how much space you have in the 12% bracket.)
jeffyscott wrote:
Fri Jun 08, 2018 7:06 am
I have always read that it's best leave the Roth as long as possible and withdraw from TIRA first (at least as long as the withdrawals will not push you into a higher tax bracket).
Don't believe everything you read.

For example, let's take a simplified situation where you have a Roth IRA, a trad IRA, and SS income, but no other retirement assets. The two IRAs together are enough to fund your retirement, but not either one separately.

If you spend only from the tIRA and eventually empty it out, you will pay 0 income tax from that point forward. Which means that you either should have tapped the Roth more often, or converted less, so that you could fill those future 0% brackets with more tIRA withdrawals.

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David Jay
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Re: Withdraw from TIRA or Roth, it doesn't matter?

Post by David Jay » Fri Jun 08, 2018 11:48 am

House Blend wrote:
Fri Jun 08, 2018 10:49 am
Generally, you should Roth convert only if you believe that your current tax rate is low compared to some future tax rate you will face.
I agree. This being said, since current tax law is written to expire in 10 years, under today's law it is unlikely that you will be in the 12% tax bracket later in life because the 12% bracket will go back to 15%.

If the law is changed and it stays at 12%, so be it. Still no loss (just no benefit). I would convert to the top of the 12% bracket every year (this is my intention after I retire next year).
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Re: Withdraw from TIRA or Roth, it doesn't matter?

Post by patrick013 » Fri Jun 08, 2018 7:58 pm

If your current marginal tax rate is lower than the one you
expect in the future, spend from tax-deferred. If your current
marginal tax rate is higher than the marginal tax rate you expect
in the future, spend from the Roth account. The chore is
always estimating future taxes accurately.

If equal tax rates expected I'd keep the Roth for last as it has
better features and is more flexible to give to heirs, etc..
age in bonds, buy-and-hold, 10 year business cycle

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jeffyscott
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Re: Withdraw from TIRA or Roth, it doesn't matter?

Post by jeffyscott » Fri Jun 08, 2018 10:18 pm

House Blend wrote:
Fri Jun 08, 2018 10:49 am
It's true that both circumstances could be in play during the same tax year. As you point out, covering expenses from the Roth or tax-deferred in that situation can put you in more or less the same place financially. One advantage I do see for Roth-withdrawing is that it is harder to hit the top of a tax bracket these days, now that recharacterization is not an option.

Ex. If early in the year you forsee $X of space in the 12% bracket, but are unsure how much you will need to draw from an IRA in order to cover expenses, you might as well convert $X now, and plan on tapping the Roth as needed.
That's one of the things that led me to think more about this and come to the realization that it ends up not mattering which source is used for spending. This is my first year of doing conversions and I had previously been thinking that it should only be done near end of the year in order to know better how much I can convert.
press on, regardless - John C. Bogle

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Re: Withdraw from TIRA or Roth, it doesn't matter?

Post by DSInvestor » Fri Jun 08, 2018 10:43 pm

jeffyscott wrote:
Fri Jun 08, 2018 10:18 pm

That's one of the things that led me to think more about this and come to the realization that it ends up not mattering which source is used for spending. This is my first year of doing conversions and I had previously been thinking that it should only be done near end of the year in order to know better how much I can convert.
Do you have assets in taxable accounts? If yes, the source is important as the tax cost to withdraw from taxable to meet expenses could be lower than withdrawing from 457b, 401k, 403b etc. This is because QDI (Qualified Dividend Income) and LTCG (Long Term Capital Gains) can be taxed at 0% Fed. If you need 40K to pay for a car, a 40K withdrawal from 457/401k/403b/TIRA adds 40K of ordinary income to your AGI. This 40K of TIRA withdrawal will fully consume your standard deduction thus pushing any Roth conversion income into higher brackets. Raising 40K from a taxable account doesn't necessarily increase your AGI by 40K because the amount of the capital gain depends on the cost basis of the shares sold.

If you have QDI/LTCG income in your tax situation, this leaves more room for you to consume your standard deduction space (24K if Married Filing Jointly) and lower tax brackets for ordinary income. This allows for more of your Roth conversions to be taxed at 0% because the QDI/LTCG income is stacked on top of the ordinary income.
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Re: Withdraw from TIRA or Roth, it doesn't matter?

Post by jeffyscott » Sat Jun 09, 2018 6:19 am

Those are good points for others looking at this to consider.

For my personal situation, pension puts us permanently in the 12% bracket. A sole survivor will be close to or in the 22%. So will definitely be filling up the 12% bracket with conversions. High medical expenses would be about the only way we might avoid paying at least 12% on some of the tax deferred money.
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Re: Withdraw from TIRA or Roth, it doesn't matter?

Post by grabiner » Tue Jun 12, 2018 7:42 pm

jeffyscott wrote:
Fri Jun 08, 2018 7:06 am
I have always read that it's best leave the Roth as long as possible and withdraw from TIRA first (at least as long as the withdrawals will not push you into a higher tax bracket). However, if I plan do conversions to the top of the 12% bracket each year, it seems that it does not actually matter where I take withdrawals from, unless I am missing something?

For example, if I withdraw $25,000 from TIRA and convert $25,000 TIRA to Roth that is essentially no different than withdrawing $25,000 from Roth and converting $50,000 in TIRA to Roth. In both cases I have $25,000 to spend and pay income taxes on $50,000. In both cases I also end up with $50,000 less in TIRA and $25,000 more in Roth.
These two are equivalent. Really, the decision you are making is how much to convert. You needed to spend $25,000, but you could keep your Roth balance unchanged, or increase it by $22,000 as in your example (paying $3000 tax on a $25,000 conversion), or increase it by $44,000 (if you could convert $50,000 and stay in the 12% bracket). And you want to get money out of your TIRA before you go into a higher tax bracket (one spouse dies, SS tax phase-in hits, or the 12% bracket goes back to 15%) or you need to take RMDs that you don't want to spend.
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Re: Withdraw from TIRA or Roth, it doesn't matter?

Post by Tdubs » Tue Jun 12, 2018 8:26 pm

It is comforting to know that while converting to a Roth early in retirement is usually better--even if your income declines--it isn't a lot better to do it that way. Whichever path you choose, it doesn't matter much.

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