What's Your Exit Strategy (for tax-deferred retirement accounts)

[Boglenaut]

What's your exit strategy for your tax-deferred retirement accounts?

What goes up, must come down. What comes in, must go out. Someday, whatever we put into a tax-deferred accounts, plus growth, must come out. This is something we should think about even early in our careers when the balances are low because they tend to take on a life of their own when they start growing.

So, whether you are just starting out or already into RMD range, what is your exit strategy? Which options apply? How much of each?

1. Required Minimum Distributions (RMD)
2. Income to spend after age 59.5
3. Income to spend using Rule of 55
4. Conversions to Roth
5. Leave for loved ones, let them pay the tax.
6. Charity (escapes the tax man)
7. SEPP/72t
8. Prevent or restrain growth through very conservative investment so less to take out.
9. Simply don't put any into tax deferred accounts
10. Withdraw with penalties while young, cash out any accounts when I change jobs, etc.
11. Withdraw without penalty for specified exceptions while under the age limit
12. That is far off, so I never thought about it.

Did I miss any?

{EDIT: Added #7 SEPP/72t based on Bloom2708's comment. Thanks to VanguardInvestor1972 for catching omitted #7}

[jebmke]

6. Charity (escapes the tax man)

[smitcat]

What's your exit strategy for your tax-deferred retirement accounts?

What goes up, must come down. What comes in, must go out. Someday, whatever we put into a tax-deferred accounts, plus growth, must come out. This is something we should think about even early in our careers when the balances are low because they tend to take on a life of their own when they start growing.

So, whether you are just starting out or already into RMD range, what is your exit strategy? Which options apply? How much of each?

1. Required Minimum Distributions (RMD)
2. Income to spend after age 59.5
3. Income to spend using Rule of 55
4. Conversions to Roth
5. Leave for loved ones, let them pay the tax.
6. Charity (escapes the tax man)
8. Prevent or restrain growth through very conservative investment so less to take out.
9. Simply don't put any into tax deferred accounts
10. Withdraw with penalties while young, cash out any accounts when I change jobs, etc.
11. Withdraw without penalty for specified exceptions while under the age limit
12. That is far off, so I never thought about it.

Did I miss any?

4,6,8 and 1 apply.

[Jack FFR1846]

I'm probably late, retiring at age 66 mid this year. I only then realized that RMDs would make Medicare IRMAA extra cost worse. DW and I mostly saved through 401k's so we have plenty that will hit RMDs. To reduce that, we did our first Roth conversion ever this year and will do so up to just below the IRMAA limit until RMD time. Had I understood years earlier, I would have started Roth conversions much earlier. We've sort of saved too much. Smallest violin comes out and plays....

[Stinky]

4 (Roth conversions) right now.

1 (RMDs) start in a few years, maybe with a few Roth conversions sprinkled in.

5 (leave for heirs) is the final frontier.

[pizzy]

1. Required Minimum Distributions (RMD)
2. Income to spend after age 59.5
4. Conversions to Roth

[cs412a]

I'm probably late, retiring at age 66 mid this year. I only then realized that RMDs would make Medicare IRMAA extra cost worse. DW and I mostly saved through 401k's so we have plenty that will hit RMDs. To reduce that, we did our first Roth conversion ever this year and will do so up to just below the IRMAA limit until RMD time. Had I understood years earlier, I would have started Roth conversions much earlier. We've sort of saved too much. Smallest violin comes out and plays....

Thank you. You’ve brought back fond memories of my dad - a master of the tiny violin

[Lee_WSP]

It's deferred income. I plan to treat it as such and convert it when it's tax advantageous.

[jebmke]

I'm probably late, retiring at age 66 mid this year. I only then realized that RMDs would make Medicare IRMAA extra cost worse. DW and I mostly saved through 401k's so we have plenty that will hit RMDs. To reduce that, we did our first Roth conversion ever this year and will do so up to just below the IRMAA limit until RMD time. Had I understood years earlier, I would have started Roth conversions much earlier. We've sort of saved too much. Smallest violin comes out and plays....

Only if you denied yourself during accumulation. Alternatively, maybe you were overpaid.

[MrBobcat]

2. Is the closest, spend the tax-deferred retirement account first. It should be fairly well drained between planned retirement age of 60 to planned SS at age 70. This will leave taxable and roth accounts intact for 70 and after.

[Boglenaut]

I'm probably late, retiring at age 66 mid this year. I only then realized that RMDs would make Medicare IRMAA extra cost worse. DW and I mostly saved through 401k's so we have plenty that will hit RMDs. To reduce that, we did our first Roth conversion ever this year and will do so up to just below the IRMAA limit until RMD time. Had I understood years earlier, I would have started Roth conversions much earlier. We've sort of saved too much. Smallest violin comes out and plays....

Jack, I think a lot of people who save a lot are in your situation. I made this thread to force people to think about it early. I think one of the best things to happen to me was attending a live Boglehead meeting and overhearing the older Bogleheads complain during a break about how RMDs were killing them. That made it go from being a far-off abstract concept to something very real.

I keep imagining that fish-guy from Star Wars yelling "It's a trap!"

[tenkuky]

I keep imagining that fish-guy from Star Wars yelling "It's a trap!"

I can't imagine Admiral Ackbar thinking about RMDs at that moment

[Exchme]

How about medical expenses. Father was in memory care for a decade, that took care of his IRA.

[Boglenaut]

For my wife and I:

1. Required Minimum Distributions (RMD)
2. Income to spend after age 59.5 (but not enough reduce it much)
4. Conversions to Roth
5. Leave for loved ones, let them pay the tax.
8. Prevent or restrain growth through very conservative investment so less to take out.

Our tax-deferred started growing out of hand, especially when I rolled over a pension lump sum offer into an IRA. That tax liability was always there, except it was more obvious on my spreadsheet sitting in the IRA. That, and it grew a lot faster in my IRA than when it a pension due to re-balancing in that account.

[Boglenaut]

How about medical expenses. Father was in memory care for a decade, that took care of his IRA.

I am sorry to hear that about your father. It must have been very tough on you and your family.

That is #11 on my list. There were too many exceptions to list:

https://www.aarp.org/money/taxes/info-2 ... awals.html

[jebmke]

How about medical expenses. Father was in memory care for a decade, that took care of his IRA.

That would be included in item #2

[crefwatch]

Well, note that many people in Skilled Nursing or Memory Care have huge deductible medical expenses, so IRA withdrawal options don't have a large effect. Their taxable pensions and the like get sheltered by the massive tax deduction as well. My mother owed no federal tax for her last three years at least, and had no IRA at the time.

[Boglenaut]

I keep imagining that fish-guy from Star Wars yelling "It's a trap!"

I can't imagine Admiral Ackbar thinking about RMDs at that moment

Good one!

But maybe he was? See 3:30 in this video:

https://www.youtube.com/watch?v=7oWfo4D6eOU

PS - Luke says the Rebel Alliance matches 10% in their Roths!

[Inframan4712]

Start with I-orp.com. EDIT: Per other posters, no longer supported. Original post below.


It currently recommends a mix of taxable and tax-deferred for the first few years.

It doesn’t recommend Roth conversion for reasons found at the bottom of that page, but we will probably do some.

The strategy will change depending on if I retire at 62, 65 or some other age. If we need low taxable income from 62-65 for ACA subsidy then will drain taxable first.

[mhc]

I retired earlier this year at 55 years old. Yesterday, I ran the Fidelity retirement planner (formerly R.I.P.). Under average market returns, my RMD maxes out at $400k. With everything else, if RMD is $400k, then my total income could be $500-600k/yr. That is way more than we need. This is the consequences of retiring early with a very high level of success. I am finally doing some serious analysis to determine my Roth conversion strategy. I'm thinking at a minimum I'll do Roth conversions on all the equities in the 401k. That will leave just bonds in the 401k, which will grow more slowly.

So I think I'll do: 1, 4, 6, 8

[tenkuky]

Start with I-orp.com. It currently recommends a mix of taxable and tax-deferred for the first few years.

Is anyone else have trouble with the i-ORP page? After I input all my info, it creates a 401 error.

[randomguy]

I'm probably late, retiring at age 66 mid this year. I only then realized that RMDs would make Medicare IRMAA extra cost worse. DW and I mostly saved through 401k's so we have plenty that will hit RMDs. To reduce that, we did our first Roth conversion ever this year and will do so up to just below the IRMAA limit until RMD time. Had I understood years earlier, I would have started Roth conversions much earlier. We've sort of saved too much. Smallest violin comes out and plays....

Jack, I think a lot of people who save a lot are in your situation. I made this thread to force people to think about it early. I think one of the best things to happen to me was attending a live Boglehead meeting and overhearing the older Bogleheads complain during a break about how RMDs were killing them. That made it go from being a far-off abstract concept to something very real.

I keep imagining that fish-guy from Star Wars yelling "It's a trap!"

We have had dozens of threads on this topic. It really isn't a trap. It is very hard to save enough in 401(K)s to generate enough income to make the tax situation worse. If you were contributing in the 22% bracket when working, you can pretty much take out 364k/year and come out ahead. That is an income of 2x of what you had when working. Now maybe you have some big increase in income when working and those old 15% deductions come out at 24%, but those people tend to be the exception not the rule. The issue is that we can't see the alternatives. We are staring at the tax bill now and not thinking about those 30 years of tax deferral and income smoothing that result in you ending up with more spendable money.

And the good news is for people these days, you can skip the issue if this is really something that scares you. Just stick your money in a Roth. That wasn't an option for the people saving in the 80s/90s. If you end up with more spendable money will be situational dependant.

[JakeyLee]

I’m 6 years away (53 & retired), but planning on #2 to bridge gap for Social Security between ages 59.5 ‘till 70. Maybe it will reduce my RMD tax bomb a bit.. who knows . But I can afford drawing down some pre-tax in order to maximize my longevity insurance. I’ve been doing some smallish Roth conversions. But I’m not terribly interested in getting too deep into the 22% tax bracket; music less 24%. I’m trying to NOT let the tax tail wag the dog. First world problems, I guess.

[randomguy]

I retired earlier this year at 55 years old. Yesterday, I ran the Fidelity retirement planner (formerly R.I.P.). Under average market returns, my RMD maxes out at $400k. With everything else, if RMD is $400k, then my total income could be $500-600k/yr. That is way more than we need. This is the consequences of retiring early with a very high level of success. I am finally doing some serious analysis to determine my Roth conversion strategy. I'm thinking at a minimum I'll do Roth conversions on all the equities in the 401k. That will leave just bonds in the 401k, which will grow more slowly.

So I think I'll do: 1, 4, 6, 8

Are you looking at nominal or real dollars? My experience is that a lot of panic is because people use nominal dollars and that 400k of dollars in 2063 is only 150k in 2023 dollars.

[randomguy]

I’m 6 years away (53 & retired), but planning on #2 to bridge gap for Social Security between ages 59.5 ‘till 70. Maybe it will reduce my RMD tax bomb a bit.. who knows . But I can afford drawing down some pre-tax in order to maximize my longevity insurance. I’ve been doing some smallish Roth conversions. But I’m not terribly interested in getting too deep into the 22% tax bracket; music less 24%. I’m trying to NOT let the tax tail wag the dog. First world problems, I guess.

If you were retired today, you could make an arguement you should be maxing out the 24% bracket. Better to pay 24% now than 25% in a couple of years. Less taxes now and maybe less later as you might avoid some SS taxation. Of course that would be a gamble the tax cuts expiring.

But it is easy to say that is the right move. But writing some 80k check today instead of spreading it out over half a decade might not be too appealing....

[WhiteMaxima]

plan earlier and do it right. Don’t wait and everthing become too late.

[260chrisb]

For me it's #2 and #4 and never worry about #1 being a factor.

[JakeyLee]

I’m 6 years away (53 & retired), but planning on #2 to bridge gap for Social Security between ages 59.5 ‘till 70. Maybe it will reduce my RMD tax bomb a bit.. who knows . But I can afford drawing down some pre-tax in order to maximize my longevity insurance. I’ve been doing some smallish Roth conversions. But I’m not terribly interested in getting too deep into the 22% tax bracket; music less 24%. I’m trying to NOT let the tax tail wag the dog. First world problems, I guess.

If you were retired today, you could make an arguement you should be maxing out the 24% bracket. Better to pay 24% now than 25% in a couple of years. Less taxes now and maybe less later as you might avoid some SS taxation. Of course that would be a gamble the tax cuts expiring.

But it is easy to say that is the right move. But writing some 80k check today instead of spreading it out over half a decade might not be too appealing....

Fantastic points. I’ve mulled this over quite a bit in the last couple years. As a young(ish) retiree, I’m a bit gun shy about spending down a chunk of my post tax dollars for conversions, as I’ve still got six years ‘till I’m 59.5. I’ve got some assets outside of my traditional IRA in a 457 and Roth between now and then, should I need them. It’s kind of funny.. I had zero fear of risk for 30 years. Now that I’m living on my investments, I’m hyper aware of black swans and boogeymen

[Mike Scott]

2, maybe 4 depending on circumstances, and 6

[mhc]

I retired earlier this year at 55 years old. Yesterday, I ran the Fidelity retirement planner (formerly R.I.P.). Under average market returns, my RMD maxes out at $400k. With everything else, if RMD is $400k, then my total income could be $500-600k/yr. That is way more than we need. This is the consequences of retiring early with a very high level of success. I am finally doing some serious analysis to determine my Roth conversion strategy. I'm thinking at a minimum I'll do Roth conversions on all the equities in the 401k. That will leave just bonds in the 401k, which will grow more slowly.

So I think I'll do: 1, 4, 6, 8

Are you looking at nominal or real dollars? My experience is that a lot of panic is because people use nominal dollars and that 400k of dollars in 2063 is only 150k in 2023 dollars.

Today dollars. The Fidelity tool shows max RMD 40 (changed from 30) years from now when I'm about 95 (changed from 85). It doesn't surprise me because it also shows that my wife (who is younger) will die with $22 million in today dollars.

[AlwaysLearningMore]

QCD''s (charity)
A series of partial annuitizations of some of the tax deferred accounts. (This will also give me some peace of mind on behalf of surviving spouse.)

[capran]

I think it does make a difference based on age and IRMAA, which had it been on my radar I would have converted more to Roth earlier. But that said...
1. Required Minimum Distributions (RMD) - when the time comes (I got my IRA to 0 via #4. Spouse is 2 years younger, and we'll be stuck for a few years with RMDS before we can get hers down)
4. Conversions to Roth
5. Leave for loved ones, let them pay the tax. IF WE CAN'T GET THE BALANCE DOWN BY AGGRESSIVE #4
8. Prevent or restrain growth through very conservative investment so less to take out. OCCURED AFTER retirement.
edit add: sound like quite a few are going to use QCD's to avoid tax, yet no one seems to view converting now, saving 3% on taxes compared to in a couple of years when the tax cuts expire, as a good alternative. I guess I live in the past, when 3% of 30,000 seemed like a good deal.

[Boglenaut]

We have had dozens of threads on this topic. It really isn't a trap.

True. I didn't mean to rehash old topics. My view is it really is very situation-dependent. The more I study this topic, the more I realize rules-of-thumb simply do not work here. When I decided to do some big conversions, I had a list of about 20 different factors I had to consider, and made a year-by-year spreadsheet mapping out my projections. It really is a very complex problem.

I guess I should have had Akbar yell out "It may or may not be a trap, depending on your highly individualized list of factors and life circumstance!". But that just didn't seem as humorous.

The point of my original post is to make sure folks at least keep in mind how they will eventually exit the tax-deferred accounts. For example, if we had no heirs but had a charity we felt strongly about, I would not convert anything. I suspect for most people, there will be some optimal balance between Roth, tax deferred, and non-qualified. Knowing what that balance should be is near impossible though.

[Svensk Anga]

I've been pretty aggressive with Roth conversions for 8 years and my tIRA balance has barely budged (in nominal terms). I converted in the 25% bracket early on to avoid a future in the 28 and have lately used the full 22% to avoid the 24, 25, 28% or even worse for a surviving spouse. My last year before IRMAA, I used up the 24% bracket because I could see I was making very little headway.

Asset location has to be part of the strategy. I've had too much stock in the tIRA. Now my Roth is nearly all stock and the tIRA has a higher proportion of fixed income. I've probably set myself up for a couple decades of fixed income outperforming equity.

[AerialWombat]

Only about 10% of my nest egg is in tax-advantaged accounts. It’s there if I need it late in life, but the reality is that I’ll probably never touch it. Charities are my account beneficiaries.

I’m only planning a tiny amount of Roth conversions each year, starting in 2024, because I’m prioritizing maximization of ACA tax credits.

[123]

...We've sort of saved too much. Smallest violin comes out and plays....

Bogleheads have created quite a symphony.

[smitcat]

Start with I-orp.com. It currently recommends a mix of taxable and tax-deferred for the first few years.

It doesn’t recommend Roth conversion for reasons found at the bottom of that page, but we will probably do some.

The strategy will change depending on if I retire at 62, 65 or some other age. If we need low taxable income from 62-65 for ACA subsidy then will drain taxable first.

IORP has not been supported for many years no and had problems even when it was supported. Please use another source to check your plans as these will be problematic. RPM and Pralana are both tools that have great value.

[smitcat]

Start with I-orp.com. It currently recommends a mix of taxable and tax-deferred for the first few years.

Is anyone else have trouble with the i-ORP page? After I input all my info, it creates a 401 error.

IORP has not been supported for many years no and had problems even when it was supported. Please use another source to check your plans as these will be problematic. RPM and Pralana are both tools that have great value.

[tibbitts]

Start with I-orp.com. It currently recommends a mix of taxable and tax-deferred for the first few years.

Is anyone else have trouble with the i-ORP page? After I input all my info, it creates a 401 error.

Please don't even try to use i-ORP any longer; it's been too long since it was supported. I appreciated the site when it was being maintained, and once you avoided a few pitfalls, it produced useful results. Unfortunately it's time to move on.

[Boglenaut]

Here is a partial list of factors I came up with to consider when deciding if money should go into a Roth or Tax-deferred account, or if to do a conversion:

Possibility you may go from joint to single filer someday (spouse passes away), and how many years like that
How many years Spouse 1 works
How many years Spouse 2 works
When taking Social Security
Will there be years with low income for Roth conversions
Will there be years you can spend down the tax deferred efficiently
IRMAA impacts for Medicare
ACA impacts if early retired
Changes in 2026 brackets under current law
Changes in 2026 standard deduction under current law
Heirs' future bracket
Planned charitable giving
NIT 3.8% on dividends
Impact on Social Security taxation
ROTH IRA eligibility
Major medical expenses
Capital gains tax brackets
Possibility of moving to higher/lower tax state
Possibility of current state changing tax rates
How will pay the conversion tax.
More efficiently filling estate limit space with Roth (tax-deferred will cause more to go over limit, especially after 2026).
Impact on college financial aid and tax credits.
Impact for Roth contribution eligibility
etc.

While I use this list to determine contribution and conversion decisions, it will also impact exit strategy as well.

[fourwheelcycle]

All of my IRA will go to charity, some now as annual QCDs, and the rest when I die, to Vanguard Charitable, to continue funding my QCD charities after I am gone. A good portion of my wife's IRA RMDs are going to charity now as QCDs. The balance of her IRA, and a smaller 457(b), will go to our two adult children. I have explained the benefit of having them inherit Roth IRAs rather than her traditional IRA. We have already converted a chunk of her IRA to a Roth IRA as a standby fund for our likely future CCRC entrance fee. Depending on our annual finances, we will look for further opportunities to convert portions of her remaining IRA to her Roth IRA to avoid high tax rates for our children after we die.

[Artsdoctor]

I think it's great to go through these exercises, not just now but in the future as well. The exist strategy you're thinking about when you're in your 50s is almost certainly going to be different than when you're in your 80s.

A few things that I'm impressed with now that I didn't pay that much attention to earlier:

1. It's very unlikely a married couple will both survive into their 90s together. It can happen but it's just not common. Going from Married Filing Jointly to Individual status on your tax return can be jarring so make plans for that.

2. If you need a skilled nursing facility, many of those deductions can go on your Schedule A so you can definitely take out quite a lot from your IRA without much tax.

3. The role of charitable giving becomes much more important later in life so don't convert everything you have to a Roth.

[Michael Patrick]

-Roth conversions
-Spend to bridge the period between when I retire (~age 65) and when I start collecting SS (current plan is age 70)
-RMDs
-Bequeath to heirs.

In that order...

[VanguardInvestor1972]

What's your exit strategy for your tax-deferred retirement accounts?

What goes up, must come down. What comes in, must go out. Someday, whatever we put into a tax-deferred accounts, plus growth, must come out. This is something we should think about even early in our careers when the balances are low because they tend to take on a life of their own when they start growing.

So, whether you are just starting out or already into RMD range, what is your exit strategy? Which options apply? How much of each?

1. Required Minimum Distributions (RMD)
2. Income to spend after age 59.5
3. Income to spend using Rule of 55
4. Conversions to Roth
5. Leave for loved ones, let them pay the tax.
6. Charity (escapes the tax man)
8. Prevent or restrain growth through very conservative investment so less to take out.
9. Simply don't put any into tax deferred accounts
10. Withdraw with penalties while young, cash out any accounts when I change jobs, etc.
11. Withdraw without penalty for specified exceptions while under the age limit
12. That is far off, so I never thought about it.

Did I miss any?

1,4, 6 likely for us.

But I *am* curious what happened to poor 7?

Kind of like floor 13 at superstitious hotels?

[sailaway]

1. Required Minimum Distributions (RMD)
2. Income to spend after age 59.5
3. Income to spend using Rule of 55
4. Conversions to Roth
5. Leave for loved ones, let them pay the tax.
6. Charity (escapes the tax man)
8. Prevent or restrain growth through very conservative investment so less to take out.
9. Simply don't put any into tax deferred accounts
10. Withdraw with penalties while young, cash out any accounts when I change jobs, etc.
11. Withdraw without penalty for specified exceptions while under the age limit
12. That is far off, so I never thought about it.

Did I miss any?

1, 2, 4, currently 5, but will switch to 6, assuming I survive my parents.

(Maybe that could be 7)

[smitcat]

I think it's great to go through these exercises, not just now but in the future as well. The exist strategy you're thinking about when you're in your 50s is almost certainly going to be different than when you're in your 80s.

A few things that I'm impressed with now that I didn't pay that much attention to earlier:

1. It's very unlikely a married couple will both survive into their 90s together. It can happen but it's just not common. Going from Married Filing Jointly to Individual status on your tax return can be jarring so make plans for that.

2. If you need a skilled nursing facility, many of those deductions can go on your Schedule A so you can definitely take out quite a lot from your IRA without much tax.

3. The role of charitable giving becomes much more important later in life so don't convert everything you have to a Roth.

"2. If you need a skilled nursing facility, many of those deductions can go on your Schedule A so you can definitely take out quite a lot from your IRA without much tax."
I understand the reason why folks speak about IRA (tax deferred) here but you can also use deductions outside of them.

[Normchad]

I plan to qualify for maximum ACA premium tax credits. So I’ll start spending the 401K once I qualify for Medicare.

[sailaway]

I plan to qualify for maximum ACA premium tax credits. So I’ll start spending the 401K once I qualify for Medicare.

We plan to start conversions in order to generate income for ACA eligibility.

[White Coat Investor]

What's your exit strategy for your tax-deferred retirement accounts?

What goes up, must come down. What comes in, must go out. Someday, whatever we put into a tax-deferred accounts, plus growth, must come out. This is something we should think about even early in our careers when the balances are low because they tend to take on a life of their own when they start growing.

So, whether you are just starting out or already into RMD range, what is your exit strategy? Which options apply? How much of each?

1. Required Minimum Distributions (RMD)
2. Income to spend after age 59.5
3. Income to spend using Rule of 55
4. Conversions to Roth
5. Leave for loved ones, let them pay the tax.
6. Charity (escapes the tax man)
8. Prevent or restrain growth through very conservative investment so less to take out.
9. Simply don't put any into tax deferred accounts
10. Withdraw with penalties while young, cash out any accounts when I change jobs, etc.
11. Withdraw without penalty for specified exceptions while under the age limit
12. That is far off, so I never thought about it.

Did I miss any?

This is my plan:

1. QCDs up to $100K then RMDs donated to charity for the Schedule A deduction
2. The remainder to charity

Inheritances will come from taxable and Roth money.

[White Coat Investor]

I keep imagining that fish-guy from Star Wars yelling "It's a trap!"

I can't imagine Admiral Ackbar thinking about RMDs at that moment

Good one!

But maybe he was? See 3:30 in this video:

https://www.youtube.com/watch?v=7oWfo4D6eOU

PS - Luke says the Rebel Alliance matches 10% in their Roths!

Love that video.