Draw down strategy

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2muchfun
Posts: 67
Joined: Wed Feb 10, 2010 10:59 am
Location: Florida

Draw down strategy

Post by 2muchfun » Mon May 18, 2020 9:13 am

Facts about me:
- Currently early 60s, retired at 55. DW is mid-fifties and was a stay at home mom
- Plan to take SS at 70
- We participate in the ACA and with a HSA qualified plan am able to max out HSA for both of us
- Focus at this time is avoiding a tax torpedo
- No pension or income in retirement
- Recently, purchased Pralana Retirement Software
- AGI is ~$24K from capital gains and dividends of taxable account

My question is around draw down sequence, as Pralana suggests that in order to avoid a tax torpedo, we drawdown from our IRA (first) and do Roth conversions, changing our AGI now to ~$70K to avoid a large RMD and the ACA cliff. Does that sound right, as all draw down strategies that I seem to see call for draw down of taxable account first, which I have been following? Also, I have not done Roth conversions, as my accountant/CPA thought it best to keep AGI as low as possible to save on ACA.

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WoodSpinner
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Joined: Mon Feb 27, 2017 1:15 pm

Re: Draw down strategy

Post by WoodSpinner » Mon May 18, 2020 9:21 am

OP,

Classic balancing act.

So what does the cash flow and tax analysis say? You are balancing ACA payments now against a future of increased taxes on RMDs.

WoodSpinner

smitcat
Posts: 5791
Joined: Mon Nov 07, 2016 10:51 am

Re: Draw down strategy

Post by smitcat » Mon May 18, 2020 9:27 am

2muchfun wrote:
Mon May 18, 2020 9:13 am
Facts about me:
- Currently early 60s, retired at 55. DW is mid-fifties and was a stay at home mom
- Plan to take SS at 70
- We participate in the ACA and with a HSA qualified plan am able to max out HSA for both of us
- Focus at this time is avoiding a tax torpedo
- No pension or income in retirement
- Recently, purchased Pralana Retirement Software
- AGI is ~$24K from capital gains and dividends of taxable account

My question is around draw down sequence, as Pralana suggests that in order to avoid a tax torpedo, we drawdown from our IRA (first) and do Roth conversions, changing our AGI now to ~$70K to avoid a large RMD and the ACA cliff. Does that sound right, as all draw down strategies that I seem to see call for draw down of taxable account first, which I have been following? Also, I have not done Roth conversions, as my accountant/CPA thought it best to keep AGI as low as possible to save on ACA.

"all draw down strategies that I seem to see call for draw down of taxable account first, which I have been following?"
Not sure what you mean by all draw down strategies call for taxable first perhaps read some of these....
https://www.kitces.com/blog/tax-efficie ... ing-needs/

As woodspinner clearly says it is a balancing act dependent upon exact SS, incomes, taxes etc both present and future.

Topic Author
2muchfun
Posts: 67
Joined: Wed Feb 10, 2010 10:59 am
Location: Florida

Re: Draw down strategy

Post by 2muchfun » Mon May 18, 2020 10:10 am

WoodSpinner wrote:
Mon May 18, 2020 9:21 am
OP,

So what does the cash flow and tax analysis say? You are balancing ACA payments now against a future of increased taxes on RMDs.

WoodSpinner
It shows saving a large sum in taxes by staying in the ACA boundary, paying some taxes now and less later. My questioning this was because It seemed contrary from what I had read previously (spending down IRA accounts before taxable account).

Thank you smitcat for the article. I'll review it.

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midareff
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Location: Biscayne Bay, South Florida

Re: Draw down strategy

Post by midareff » Mon May 18, 2020 10:23 am

2muchfun wrote:
Mon May 18, 2020 10:10 am
WoodSpinner wrote:
Mon May 18, 2020 9:21 am
OP,

So what does the cash flow and tax analysis say? You are balancing ACA payments now against a future of increased taxes on RMDs.

WoodSpinner
It shows saving a large sum in taxes by staying in the ACA boundary, paying some taxes now and less later. My questioning this was because It seemed contrary from what I had read previously (spending down IRA accounts before taxable account).

Thank you smitcat for the article. I'll review it.
Your approach seems reasonable... maximize IRA draw while still minimizing tax and penalty exposure while converting to Roth within those boundaries. Blanket statements like withdraw from taxable first without regard to capital gains, cash flows, asset depletion rates and other individual factors make no sense.

retired@50
Posts: 2995
Joined: Tue Oct 01, 2019 2:36 pm
Location: Living in the U.S.A.

Re: Draw down strategy

Post by retired@50 » Mon May 18, 2020 10:26 am

To avoid the tax torpedo, one way or another, you have to get some of the money out of the traditional IRA.

You can simply use it for spending, or you can convert it to a Roth account.

If you stay under the 400% of Federal Poverty Line for your household (presuming 2 people) then you can adjust your IRA to Roth conversions to avoid the cliff.

Regards,
This is one person's opinion. Nothing more.

livesoft
Posts: 71894
Joined: Thu Mar 01, 2007 8:00 pm

Re: Draw down strategy

Post by livesoft » Mon May 18, 2020 10:27 am

The terminology can sometimes be unclear.

Draw down strategy
Withdrawal strategy
Roth conversion strategy

can all mean the same thing to some people and they can all mean different things to other people.

Basically, you are using your taxable account to pay expenses (including taxes) while trying to optimize ACA premium credits along with Roth conversions. So Withdrawals from tax-deferred accounts are not really Draw Downs of the total portfolio because you are converting them to Roth IRAs and you are not spending them. You are even using your taxable investments to pay taxes on the Roth conversions. The Roth conversions will reduce your future RMDs.

I don't know of any good way to model all this because of future unknowns including changes in the laws that will affect all decisions that might be made today.

As an aside, I know of early retirees who register for a couple courses at the local university and sign up for the student health care plan.
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Topic Author
2muchfun
Posts: 67
Joined: Wed Feb 10, 2010 10:59 am
Location: Florida

Re: Draw down strategy

Post by 2muchfun » Mon May 18, 2020 11:11 am

Any preferences as to withdrawals from the IRA before or after the Vanguard Variable Annuity?

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