Spending in Retirement: Roth, 401k, Taxable

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
OldSport
Posts: 284
Joined: Tue Jul 25, 2017 7:01 pm

Spending in Retirement: Roth, 401k, Taxable

Post by OldSport » Sat Jan 20, 2018 9:19 pm

A financially independent married couple is approaching retirement. They have assets in Roth IRA, 401k, 403b, and taxable accounts. After Social Security and pension, they will need much less than the safe withdrawal rate of the portfolio for their wants and needs - the portfolio should last indefinitely. They want to leave an inheritance to their children.

They are not sure where to draw from what first. They seemed like they wanted to spend from savings/taxable and leave their heirs the 401k/403b. I'm not sure that's the best idea due to taxes. Won't their heirs benefit from step up basis for taxable? I don't think they know about RMDs.

What should they do? I think they have sizeable amounts in all 3 buckets.

invst65
Posts: 388
Joined: Thu Nov 27, 2014 11:04 am

Re: Spending in Retirement: Roth, 401k, Taxable

Post by invst65 » Sat Jan 20, 2018 9:37 pm

The general rule that I've heard and what I plan to do (I'm retired) is take withdrawals from the accounts with the biggest tax bite first. Normally that would be IRA (tax-deferred) first, Taxable second, and Roth last. The Roth would normally be a no-brainer since there is no tax and thus why you want to leave it for last but between IRA and Taxable it would really depend on which has the biggest tax bite. Normally it would be IRA because its taxed as ordinary income, followed by Taxable but it really depends. Long term capital gains is currently 15% and even 0% if your income is less than 70k. RMD can also make it a no-brainer but beyond that I think you have to just figure out which is best based on your tax bracket and adjusted gross income.

An exception to the rule would be where to take the money from if you want a big chunk of cash to buy a major purchase like a house. Roth could be attractive in that situation because it's a no-tax, no-brainer but you really have to figure all the long and short term implications at the time. If you take it from Roth, you've said goodbye to all the tax free money you were planning on having later.

Beyond just withdrawals you should also consider how you allocate funds in those three types of accounts. I prefer growth in the reverse order of withdrawal - only inasmuch as you can actually predict where the growth will come form, of course. In other words, I aim for the biggest growth based on available data and current outlook in my Roth and the most safety and thus the lowest potential growth in my IRA because of the RMD's and because I am going to have to fork so much of it over to the government.

At least that's the general rules as I understand them currently and what makes sense to me. Anybody else can feel free to correct me if I'm wrong. If my thinking is wrong, I'm glad when someone lets me know and don't take offense at all. At least when it comes to this subject.
Last edited by invst65 on Sat Jan 20, 2018 11:52 pm, edited 8 times in total.

bltn
Posts: 36
Joined: Mon Feb 20, 2017 9:32 pm

Re: Spending in Retirement: Roth, 401k, Taxable

Post by bltn » Sat Jan 20, 2018 10:01 pm

If I had plenty of support from my pensions and social security, and I wanted to leave a sizable inheritance, I would take money out of the IRA first. I d make sure my taxable money is invested tax efficiently, like stock index funds and municipal bonds depending on your tax bracket. I wouldn t touch my Roth unless I reallly needed the money.
With the step up in basis on the stock funds, and the liberal estate taxes, the inheritance should be pretty close to tax free. Remaining IRA money would of course be subject to income tax.
As I understand it.

gostars
Posts: 122
Joined: Mon Oct 09, 2017 7:53 pm

Re: Spending in Retirement: Roth, 401k, Taxable

Post by gostars » Sat Jan 20, 2018 10:23 pm

Another consideration is what marginal bracket the withdrawal ends up in with respect to taxation of social security income. If taking the amount needed from the IRA ends up in the marginal rate hump, then it might make sense to split it up between the IRA and selling lots in taxable with low unrealized gains to stay out of that. I'm not sure how this all shakes out with the new brackets.

User avatar
GerryL
Posts: 1599
Joined: Fri Sep 20, 2013 11:40 pm

Re: Spending in Retirement: Roth, 401k, Taxable

Post by GerryL » Sat Jan 20, 2018 10:51 pm

OldSport wrote:
Sat Jan 20, 2018 9:19 pm
A financially independent married couple is approaching retirement. They have assets in Roth IRA, 401k, 403b, and taxable accounts. After Social Security and pension, they will need much less than the safe withdrawal rate of the portfolio for their wants and needs - the portfolio should last indefinitely. They want to leave an inheritance to their children.

They are not sure where to draw from what first. They seemed like they wanted to spend from savings/taxable and leave their heirs the 401k/403b. I'm not sure that's the best idea due to taxes. Won't their heirs benefit from step up basis for taxable? I don't think they know about RMDs.

What should they do? I think they have sizeable amounts in all 3 buckets.
Well, they are going to have to know about RMDs in order to make an informed decision. They may find that the RMDs will more than cover their "wants and needs" that remain after SS and pension. They can then reinvest the excess I taxable and let it grow for their heirs. The open question is what they should do before they reach 70.5.

User avatar
GerryL
Posts: 1599
Joined: Fri Sep 20, 2013 11:40 pm

Re: Spending in Retirement: Roth, 401k, Taxable

Post by GerryL » Sat Jan 20, 2018 10:52 pm

Delete duplicate
Last edited by GerryL on Sat Jan 20, 2018 11:37 pm, edited 1 time in total.

OldSport
Posts: 284
Joined: Tue Jul 25, 2017 7:01 pm

Re: Spending in Retirement: Roth, 401k, Taxable

Post by OldSport » Sat Jan 20, 2018 11:18 pm

I think the husband plans to retire at 70, but the wife is already retired and drawing SS. They are 65. He is already FI, he just really likes working.

mhalley
Posts: 5412
Joined: Tue Nov 20, 2007 6:02 am

Re: Spending in Retirement: Roth, 401k, Taxable

Post by mhalley » Sun Jan 21, 2018 12:08 am

Another option is to do some Roth conversions while living off their ss and pensions. This will decrease rmds and increase the amount the heirs will get in Roth. But if he is still working, then this might not work. Remember that if they do Roth conversions after 70, they must do rmds first. Kitces has a good article on this here.
https://www.kitces.com/blog/tax-efficie ... ing-needs/

Post Reply