Which Accounts should I draw 350K from?

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sandramjet
Posts: 441
Joined: Thu Oct 23, 2014 11:28 pm

Which Accounts should I draw 350K from?

Post by sandramjet »

Due to a completely unexpected situation that arose this year, I find I need to make a large withdrawal from our retirement funds this year. I'm trying to decide what the best way to do this, and which accounts to use.

First, some background (numbers are not precise but close enough...)
MFJ
Currently taking the standard deduction, though itemizing last year was within 1K of the standard, so we are on the bubble of deducting.
Not taking any SS yet.
Both are Medicare (hence subject to IRMAA)
We have approximately 2.5M in retirement funds. Of this, only about 150K is Roth; rest is traditional 401K/IRA monies.
No taxable account (well, maybe 1K in taxable somewhere, but basically none)
We have approximately 72k/yr in pensions. (non-COLA)
No state taxes

We are not doing "conventional" Roth conversions. Instead, what we do is to convert approximately 70K at the start of each year to Roth. We use pension + money from that Roth conversion to pay our yearly expenses. At the end of the year, I'll typically look at our AGI for the year and then convert enough more but not exceeding the first IRMAA bump. That is, we convert enough to bring our AGI up to approximately 170K or whatever the current estimate of the IRMAA threshold. Our yearly expenses typically range 100-140K per year, so whatever we don't spend is left in the Roth for future years.

(And yes, I realize that this means our RMD's will probably be large. I'm ok with that...in part because we expect to do some QCD's, and in part because I have watched both of my parents spend a lot of money on long term care -- 5-10years of 24/7 care, all of which was tax deductible)

Now fast forward to current situation... Due to some unexpected circumstances, we need to withdraw approximately 350K this year. I'm trying to figure out where to pull the money from. Here's the scenarios I've currently considered:

1) Take out HELOC for 200K, and 150K from Roth IRA. This option doesn't alter our AGI this year. My plan is to bump up our withdrawals over the next few years to stay just the second IRMAA bump, and use that to pay down the HELOC over the next few years.

2) Take 150K from Roth, and a net 200K from TDA. (Obviously, we'll have to take more than 200k since we have to pay the tax from TDA) This will obviously bump AGI up to something like 360K this year, pushing us up into a 32% bracket and probably the second highest IRMAA bracket, though just for a year.

3) Take all 350K from TDA, leaving Roth accounts alone. This will incur the largest tax hit, likely 35% marginal bracket, but still in the same IRMAA bracket as option 2)


My first reaction is to go with option 1, although I'm just starting to actually model the impacts. I'm looking for any thoughts on which of these options, or any I have not thought of, might be best and why.

Just in case anyone is wondering, the 350K expense this year is a done deal; there is no way to spread that out.

Thanks for your inputs!
Last edited by sandramjet on Thu Aug 05, 2021 10:53 pm, edited 1 time in total.
Bullhead5829
Posts: 28
Joined: Sun Mar 29, 2020 2:47 pm

Re: Which Accounts should I draw 350K from?

Post by Bullhead5829 »

The tool for modelling 2021 tax scenarios on mortgagecalculator.org may provide you with some insight.

The information you provided may not be complete (pensions only, no Social Security annuities, MFJ over 65 standard deduction or itemized deductions?), but with the information you provided, it looks like scenario #1 $72k pensions as ordinary income with a $70 Roth conversion would incur about $16k tax. Scenario #3 $72k pensions as ordinary income with $350k from TDA would incur about $87k tax (around $70k increase).

As you noted, in either scenario #2 or #3 the IRMAA Tier 5 vs. Tier 1 hit for two persons (about $7800 combined) would only be for the single year (better than being single and in Tier 4 or 5 probably forever, like me!).

Using such modelling figures may provide comparison information for using a HELOC as part or entire source of funds for the needed $350k. As in, what repayment period and interest rate to estimate the interest cost of the HELOC source of funds vs. the Roth and TDA sources. On the face of it, scenario #3 may be out of consideration- I doubt that a $200k HELOC over a 5 or 10 year repayment period would incur as much as $70k in interest cost at current rates.
Topic Author
sandramjet
Posts: 441
Joined: Thu Oct 23, 2014 11:28 pm

Re: Which Accounts should I draw 350K from?

Post by sandramjet »

Thanks... I've updated the OP with the the info you mentioned about SS, etc.
Topic Author
sandramjet
Posts: 441
Joined: Thu Oct 23, 2014 11:28 pm

Re: Which Accounts should I draw 350K from?

Post by sandramjet »

Just looking for any other inputs!
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FiveK
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Joined: Sun Mar 16, 2014 2:43 pm

Re: Which Accounts should I draw 350K from?

Post by FiveK »

Have you tried multi-year modeling tools such as Optimal Retirement Planner - Extended Parameter Form or Retiree Portfolio Model?
fyre4ce
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Joined: Sun Aug 06, 2017 11:29 am

Re: Which Accounts should I draw 350K from?

Post by fyre4ce »

For some reason my first thought when I read the title was, "I hope this person isn't getting scammed for $350k!" I'm 99% sure that's not what's going on here, but here's a link to some simple scam-spotting guidelines to benefit anyone who may read this.
Topic Author
sandramjet
Posts: 441
Joined: Thu Oct 23, 2014 11:28 pm

Re: Which Accounts should I draw 350K from?

Post by sandramjet »

fyre4ce wrote: Fri Aug 06, 2021 6:55 pm For some reason my first thought when I read the title was, "I hope this person isn't getting scammed for $350k!" I'm 99% sure that's not what's going on here, but here's a link to some simple scam-spotting guidelines to benefit anyone who may read this.
Definitely not the case; it's a sudden opportunity to purchase a house that I was not counting on doing at this time. But a death in the family accelerated the plans.
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Mlm
Posts: 613
Joined: Sat Apr 09, 2016 6:00 pm

Re: Which Accounts should I draw 350K from?

Post by Mlm »

sandramjet wrote: Fri Aug 06, 2021 11:00 pm

Definitely not the case; it's a sudden opportunity to purchase a house that I was not counting on doing at this time. But a death in the family accelerated the plans.
Reviewing your future plans for this purchase might give some insights for what you should currently do
Mary
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