How much to withdraw from Roth vs. tax-deferred in retirement?

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
CULater
Posts: 1310
Joined: Sun Nov 13, 2016 10:59 am

How much to withdraw from Roth vs. tax-deferred in retirement?

Post by CULater » Mon Mar 12, 2018 11:28 am

I have about 30% of my retirement savings in a Roth IRA and 70% mostly in tax-deferred 403-b with TIAA traditional earning around 3.5%. I'd like to know if there are any rules of thumb for how much I should be withdrawing from the Roth vs. the tax-deferred account for income. I'd always assumed that the tax-deferred should be depleted before touching the Roth, but someone was arguing that the Roth should be depleted first. What are the factors to consider in making a determination, and what are folks doing?
May you have the hindsight to know where you've been, The foresight to know where you're going, And the insight to know when you've gone too far. ~ Irish Blessing

livesoft
Posts: 62297
Joined: Thu Mar 01, 2007 8:00 pm

Re: How much to withdraw from Roth vs. tax-deferred in retirement?

Post by livesoft » Mon Mar 12, 2018 11:41 am

Taxes when you withdraw and in the future are something to consider.

If withdrawing from tax-deferred causes you to fall over some heavily penalized tax cliffs, then you may wish to figure out whether that is OK or if depleting Roth somewhat is beneficial.

And don't forget about possible future RMDs, too.

In other words, there are no rules of thumb.
Wiki This signature message sponsored by sscritic: Learn to fish.

KlangFool
Posts: 9956
Joined: Sat Oct 11, 2008 12:35 pm

Re: How much to withdraw from Roth vs. tax-deferred in retirement?

Post by KlangFool » Mon Mar 12, 2018 11:43 am

CULater wrote:
Mon Mar 12, 2018 11:28 am
I have about 30% of my retirement savings in a Roth IRA and 70% mostly in tax-deferred 403-b with TIAA traditional earning around 3.5%. I'd like to know if there are any rules of thumb for how much I should be withdrawing from the Roth vs. the tax-deferred account for income. I'd always assumed that the tax-deferred should be depleted before touching the Roth, but someone was arguing that the Roth should be depleted first. What are the factors to consider in making a determination, and what are folks doing?
CULater,

IMHO, you are asking the wrong questions. Please read the following thread.

viewtopic.php?t=87471
"How to pay ZERO taxes in retirement with 6-figure expenses"

You should separate what you spend each year from what you withdraw each year.

A) You should have 1 year to 2 years of expense in cash. This is where your spending money coming from.

B) You should withdraw the amount that achieves maximum tax efficiency for you. For example, paying 0% tax. Then, use that money to refill (A).

KlangFool

SpideyIndexer
Posts: 336
Joined: Thu Apr 02, 2015 10:13 pm

Re: How much to withdraw from Roth vs. tax-deferred in retirement?

Post by SpideyIndexer » Mon Mar 12, 2018 1:13 pm

It is difficult to answer the question without having a perfect crystal ball wrt to future income tax rates and brackets and expenses. Look up the threads on Roth conversion strategy in the early years of retirement prior to age 70 1/2 when RMDs must be taken; the same issues apply there.

User avatar
grabiner
Advisory Board
Posts: 22529
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: How much to withdraw from Roth vs. tax-deferred in retirement?

Post by grabiner » Tue Mar 13, 2018 9:09 pm

You want to minimize the marginal tax rate at which you make the tax-deferred withdrawals; withdraw traditional money this year if withdrawing Roth money later means that you will pay a higher rate on the traditional withdrawals later.

For example, if you will be in the phase-in for Social Security taxation, your marginal tax rate will be 22% (2018-2025 tax rules) or 27.75% (starting in 2026), so you should withdraw from the tax-deferred account up to the top of the 22% bracket, and even use the rest of this bracket to convert traditional to Roth accounts. If you will be beyond the phase-in and have a 15% marginal tax rate, then you should only withdraw from the traditional account up to the top of the 12% bracket now.
Wiki David Grabiner

smitcat
Posts: 1764
Joined: Mon Nov 07, 2016 10:51 am

Re: How much to withdraw from Roth vs. tax-deferred in retirement?

Post by smitcat » Wed Mar 14, 2018 8:39 am

CULater wrote:
Mon Mar 12, 2018 11:28 am
I have about 30% of my retirement savings in a Roth IRA and 70% mostly in tax-deferred 403-b with TIAA traditional earning around 3.5%. I'd like to know if there are any rules of thumb for how much I should be withdrawing from the Roth vs. the tax-deferred account for income. I'd always assumed that the tax-deferred should be depleted before touching the Roth, but someone was arguing that the Roth should be depleted first. What are the factors to consider in making a determination, and what are folks doing?

This is the best article I have found on taxes and withdrawal strategy in retirement....
https://www.kitces.com/blog/tax-efficie ... ing-needs/

retiredjg
Posts: 33553
Joined: Thu Jan 10, 2008 12:56 pm

Re: How much to withdraw from Roth vs. tax-deferred in retirement?

Post by retiredjg » Wed Mar 14, 2018 8:58 am

I like to withdraw from tax-deferred in order to reduce the amount that will be subject to RMDs when that time comes. Occasionally, I'll take a bit from Roth if it keeps me under some limit I don't want to cross.

I can't think of any reason to withdraw consistently from Roth to a point of or near depletion when there is tax-deferred money available.

Edited for clarity.
Last edited by retiredjg on Wed Mar 14, 2018 12:20 pm, edited 1 time in total.

smitcat
Posts: 1764
Joined: Mon Nov 07, 2016 10:51 am

Re: How much to withdraw from Roth vs. tax-deferred in retirement?

Post by smitcat » Wed Mar 14, 2018 9:46 am

retiredjg wrote:
Wed Mar 14, 2018 8:58 am
I like to withdraw from tax-deferred in order to reduce the amount that will be subject to RMDs when that time comes. Occasionally, I'll take a bit from Roth if it keeps me under some limit I don't want to cross.

I can't think of any reason to withdraw consistently from Roth when there is tax-deferred money available.
Perhaps read the above posted article by Kitces and review the accompanying charts.....

retiredjg
Posts: 33553
Joined: Thu Jan 10, 2008 12:56 pm

Re: How much to withdraw from Roth vs. tax-deferred in retirement?

Post by retiredjg » Wed Mar 14, 2018 10:07 am

smitcat wrote:
Wed Mar 14, 2018 9:46 am
retiredjg wrote:
Wed Mar 14, 2018 8:58 am
I like to withdraw from tax-deferred in order to reduce the amount that will be subject to RMDs when that time comes. Occasionally, I'll take a bit from Roth if it keeps me under some limit I don't want to cross.

I can't think of any reason to withdraw consistently from Roth when there is tax-deferred money available.
Perhaps read the above posted article by Kitces and review the accompanying charts.....
Maybe I missed it (I mostly skimmed). I'm not sure what that article has to do with what I said. Kitces is talking mostly about taxable and tIRA. I'm talking about tIRA and Roth IRA (no taxable account) which I think is what the original poster asked about.

ionball
Posts: 95
Joined: Wed Jan 31, 2018 12:17 pm

Re: How much to withdraw from Roth vs. tax-deferred in retirement?

Post by ionball » Wed Mar 14, 2018 10:14 am

I view the Roth as a tool that will be very useful after age 70.5 and should be tapped mainly to protect against tax bracket thresholds. If your tax bracket is projected to creep upwards, then it may be beneficial to protect some Roth account balance for the future.

User avatar
lthenderson
Posts: 3429
Joined: Tue Feb 21, 2012 12:43 pm
Location: Iowa

Re: How much to withdraw from Roth vs. tax-deferred in retirement?

Post by lthenderson » Wed Mar 14, 2018 10:19 am

The book Boglehead's Guide to Retirement Planning goes into this subject in depth.

https://www.amazon.com/Bogleheads-Guide ... 470919019/

smitcat
Posts: 1764
Joined: Mon Nov 07, 2016 10:51 am

Re: How much to withdraw from Roth vs. tax-deferred in retirement?

Post by smitcat » Wed Mar 14, 2018 10:24 am

retiredjg wrote:
Wed Mar 14, 2018 10:07 am
smitcat wrote:
Wed Mar 14, 2018 9:46 am
retiredjg wrote:
Wed Mar 14, 2018 8:58 am
I like to withdraw from tax-deferred in order to reduce the amount that will be subject to RMDs when that time comes. Occasionally, I'll take a bit from Roth if it keeps me under some limit I don't want to cross.

I can't think of any reason to withdraw consistently from Roth when there is tax-deferred money available.
Perhaps read the above posted article by Kitces and review the accompanying charts.....
Maybe I missed it (I mostly skimmed). I'm not sure what that article has to do with what I said. Kitces is talking mostly about taxable and tIRA. I'm talking about tIRA and Roth IRA (no taxable account) which I think is what the original poster asked about.
The second half of the article and charts deal with Roth and Roth conversions in the mix.

User avatar
House Blend
Posts: 4483
Joined: Fri May 04, 2007 1:02 pm

Re: How much to withdraw from Roth vs. tax-deferred in retirement?

Post by House Blend » Wed Mar 14, 2018 10:50 am

retiredjg wrote:
Wed Mar 14, 2018 8:58 am
I can't think of any reason to withdraw consistently from Roth when there is tax-deferred money available.
Fast forward to a future in which your tax-deferred account is empty, and all you have left is a Roth account.

If your marginal rate in that future is lower than it is now, then you should be spending more Roth now, and less tax-deferred. (Or Roth-converting less.)

This can easily happen if most of your retirement income is from SS + Roth + trad IRA.

User avatar
Peter Foley
Posts: 4498
Joined: Fri Nov 23, 2007 10:34 am
Location: Lake Wobegon

Re: How much to withdraw from Roth vs. tax-deferred in retirement?

Post by Peter Foley » Wed Mar 14, 2018 11:01 am

I think it is helpful to develop a five year plan for withdrawals. One should note living expenses and potential sources of income and the impact of taxes regarding the mix of income sources used. Such a plan is helpful in keeping tax burdens relatively level as one moves from pre SS benefits to SS benefit recipient and from pre RMDs to mandatory RMDs (or qualified charitable distributions from IRAs).

retiredjg
Posts: 33553
Joined: Thu Jan 10, 2008 12:56 pm

Re: How much to withdraw from Roth vs. tax-deferred in retirement?

Post by retiredjg » Wed Mar 14, 2018 11:04 am

Yes, I saw that part. It seems we are not communicating and I guess that happens sometimes. :happy I took your comment to mean you thought Kitces' article disagreed with what I said. I don't think it does.

For me, it seems best to take my expenses from tIRA, also convert tIRA to Roth IRA up to my limit (IRMAA), and leave the Roth alone for now unless needed to fill in during a pinch without raising taxable income.

Depleting Roth IRA now would serve no purpose I can see and it would increase RMDs which might push me into a higher tax bracket. That is why I don't see any reason to consistently use Roth IRA for living expenses when I have tax-deferred money available to use instead.

CULater
Posts: 1310
Joined: Sun Nov 13, 2016 10:59 am

Re: How much to withdraw from Roth vs. tax-deferred in retirement?

Post by CULater » Wed Mar 14, 2018 11:12 am

The two factors that make it difficult to figure a strategy for withdrawing from pre-tax vs. Roth retirement accounts are (1) the phase-in of taxable social security benefits and (2) state tax. As you increase the amounts withdrawn from pre-tax accounts, you also can increase your effective marginal tax rate due to phase-in of taxable social security benefits, and in most states you are also increasing your state income tax as well. So, it's a lot more complicated than simply filling your federal marginal tax rate with pre-tax withdrawals. If that was all there was to it, it would be a no-brainer for me to do that by first taking my RMD and then converting funds from pre-tax to Roth to fill the bracket.
May you have the hindsight to know where you've been, The foresight to know where you're going, And the insight to know when you've gone too far. ~ Irish Blessing

retiredjg
Posts: 33553
Joined: Thu Jan 10, 2008 12:56 pm

Re: How much to withdraw from Roth vs. tax-deferred in retirement?

Post by retiredjg » Wed Mar 14, 2018 11:38 am

House Blend wrote:
Wed Mar 14, 2018 10:50 am
retiredjg wrote:
Wed Mar 14, 2018 8:58 am
I can't think of any reason to withdraw consistently from Roth when there is tax-deferred money available.
Fast forward to a future in which your tax-deferred account is empty, and all you have left is a Roth account.
For a person without a pension, I would not suggest depleting the tax-deferred account for just the reasons you mention. Something should be left there to fill in the bottom tax bracket(s) each year. Or to be deducted if there are large medical bills in later life.

Actually managing to deplete the tax-deferred account doesn't seem likely to me, but that may be because I'm not seeing the right scenario.

For a person with a pension, I don't think depleting the tax-deferred account would matter much for taxes (except the large medical bill possibility).

User avatar
House Blend
Posts: 4483
Joined: Fri May 04, 2007 1:02 pm

Re: How much to withdraw from Roth vs. tax-deferred in retirement?

Post by House Blend » Wed Mar 14, 2018 11:47 am

retiredjg wrote:
Wed Mar 14, 2018 11:04 am
Yes, I saw that part. It seems we are not communicating and I guess that happens sometimes. :happy I took your comment to mean you thought Kitces' article disagreed with what I said. I don't think it does.

For me, it seems best to take my expenses from tIRA, also convert tIRA to Roth IRA up to my limit (IRMAA), and leave the Roth alone for now unless needed to fill in during a pinch without raising taxable income.
Not sure if your comment is directed to my post. In case it is,...

I'm not saying that *you* should be routinely spending from your Roth now. For many retired Bogleheads, that's probably not a good idea. But you said you can't think of any reason to do this, so I'm trying to help out.

First let's set aside that some people earmark all or part of their Roths for beneficiaries.

If your goals include using your Roth to support your retirement, there are many scenarios where you should routinely use the Roth even while having tax-deferred assets available. One of them is exactly the flip side of what you wrote:
Depleting Roth IRA now would serve no purpose I can see and it would increase RMDs which might push me into a higher tax bracket.
Depleting tax-deferred now will decrease RMDs which might push you into a lower tax bracket in the future than the one you're in now. It might be unlikely in your case, but that doesn't make it impossible.

vested1
Posts: 1554
Joined: Wed Jan 04, 2012 4:20 pm

Re: How much to withdraw from Roth vs. tax-deferred in retirement?

Post by vested1 » Wed Mar 14, 2018 12:06 pm

Peter Foley wrote:
Wed Mar 14, 2018 11:01 am
I think it is helpful to develop a five year plan for withdrawals. One should note living expenses and potential sources of income and the impact of taxes regarding the mix of income sources used. Such a plan is helpful in keeping tax burdens relatively level as one moves from pre SS benefits to SS benefit recipient and from pre RMDs to mandatory RMDs (or qualified charitable distributions from IRAs).
+1

I just completed this task and it put things into much better perspective. In fact the exercise resulted in a tweaking to our plan. We are starting initial SS in July. The 5 year plan for taxation takes me one year past RMD. It was eye opening to see the implications of different strategies and how to minimize taxes while executing an efficient withdrawal plan to age 71.5.

vested1
Posts: 1554
Joined: Wed Jan 04, 2012 4:20 pm

Re: How much to withdraw from Roth vs. tax-deferred in retirement?

Post by vested1 » Wed Mar 14, 2018 12:17 pm

I'm surprised that taxable accounts haven't entered into this conversation. It would seem far more desirable to use taxable to avoid higher tax brackets than it would be to use Roth, especially as a long term plan to enable the Roth to grow unimpeded, and to protect gains with over 5 years of duration from taxation when eventually withdrawn.

This would be especially true after RMD's begin since Roth can only be supplemented by either conversion amounts above RMD or by earned income. This is completely academic for me, as I won't have any taxable until RMD's begin.

Maybe it was too obvious to be mentioned by this group of investors who are far wiser than me.
Last edited by vested1 on Wed Mar 14, 2018 12:19 pm, edited 1 time in total.

retiredjg
Posts: 33553
Joined: Thu Jan 10, 2008 12:56 pm

Re: How much to withdraw from Roth vs. tax-deferred in retirement?

Post by retiredjg » Wed Mar 14, 2018 12:18 pm

House Blend wrote:
Wed Mar 14, 2018 11:47 am
retiredjg wrote:
Wed Mar 14, 2018 11:04 am
Yes, I saw that part. It seems we are not communicating and I guess that happens sometimes. :happy I took your comment to mean you thought Kitces' article disagreed with what I said. I don't think it does.

For me, it seems best to take my expenses from tIRA, also convert tIRA to Roth IRA up to my limit (IRMAA), and leave the Roth alone for now unless needed to fill in during a pinch without raising taxable income.
Not sure if your comment is directed to my post. In case it is,...

I'm not saying that *you* should be routinely spending from your Roth now. For many retired Bogleheads, that's probably not a good idea. But you said you can't think of any reason to do this, so I'm trying to help out.

First let's set aside that some people earmark all or part of their Roths for beneficiaries.

If your goals include using your Roth to support your retirement, there are many scenarios where you should routinely use the Roth even while having tax-deferred assets available. One of them is exactly the flip side of what you wrote:
Depleting Roth IRA now would serve no purpose I can see and it would increase RMDs which might push me into a higher tax bracket.
Depleting tax-deferred now will decrease RMDs which might push you into a lower tax bracket in the future than the one you're in now. It might be unlikely in your case, but that doesn't make it impossible.
Thanks for your comment. No, my comment was meant for smitcat, not you. I usually include a quote to keep this confusion from happening. Sorry. :happy

I think you and I are saying the same thing.

I'm not opposed to spending some from Roth IRA and I do that (a little) from time to time.

What I think is likely to be a BAD idea is using up the Roth IRA when you still have tax-deferred money you could be using instead.
  • If I use mostly or only Roth now, my tIRA will grow and my RMDs will be larger and I might get pushed into a higher bracket later on and that could have been easily avoided (or at least reduced).

    If I mostly use tIRA now, my RMDs will be less and I am less likely to be pushed into a higher bracket later on.

I think my comment "I can't think of any reason to withdraw consistently from Roth when there is tax-deferred money available" was poorly worded and I'll edit it. I meant I can't think of a reason to deplete Roth first - which is what the original post talks about.

retiredjg
Posts: 33553
Joined: Thu Jan 10, 2008 12:56 pm

Re: How much to withdraw from Roth vs. tax-deferred in retirement?

Post by retiredjg » Wed Mar 14, 2018 12:24 pm

vested1 wrote:Maybe it was too obvious to be mentioned by this group of investors who are far wiser than me.
Or maybe it's because the original poster said the retirement money was 70% in tIRA and 30% in Roth IRA? :wink:

vested1
Posts: 1554
Joined: Wed Jan 04, 2012 4:20 pm

Re: How much to withdraw from Roth vs. tax-deferred in retirement?

Post by vested1 » Wed Mar 14, 2018 12:47 pm

retiredjg wrote:
Wed Mar 14, 2018 12:24 pm
vested1 wrote:Maybe it was too obvious to be mentioned by this group of investors who are far wiser than me.
Or maybe it's because the original poster said the retirement money was 70% in tIRA and 30% in Roth IRA? :wink:
Which proves my point in blue. 8-)

retiredjg
Posts: 33553
Joined: Thu Jan 10, 2008 12:56 pm

Re: How much to withdraw from Roth vs. tax-deferred in retirement?

Post by retiredjg » Wed Mar 14, 2018 1:30 pm

Ha! Made me laugh!

CULater
Posts: 1310
Joined: Sun Nov 13, 2016 10:59 am

Re: How much to withdraw from Roth vs. tax-deferred in retirement?

Post by CULater » Wed Mar 14, 2018 6:09 pm

I just conducted an exercise to see what my effective marginal tax would be on some selected additional amounts that I might take as distributions this year from my taxable retirement accounts. All the amounts I looked at keep me in the 22% Federal marginal tax bracket, with the largest amount taking me right to the top of that bracket.

Since I'm taking social security, larger taxable distributions cause a higher percentage of my SS benefits to become included in taxable income. Also, my state tax rate increases. Putting everything together (Federal AGI + State) I found that the effective marginal tax on the additional distributions actually declines as I withdraw larger amounts; going from 40.8% for the smallest additional distribution (about $5K) to 35% for the largest additional distribution (about $20K), which takes me to the top of the 22% Federal bracket. That seems counter-intuitive. Perhaps someone has a hunch as to what is going on here. If my numbers are correct, it might make sense to take the maximum additional withdrawal from my taxable this year ($20K) because, even though the absolute tax amount is larger (about doubles), the percentage of the distribution that goes to taxes is actually about 6% lower. Does this make sense?
May you have the hindsight to know where you've been, The foresight to know where you're going, And the insight to know when you've gone too far. ~ Irish Blessing

KlangFool
Posts: 9956
Joined: Sat Oct 11, 2008 12:35 pm

Re: How much to withdraw from Roth vs. tax-deferred in retirement?

Post by KlangFool » Wed Mar 14, 2018 6:18 pm

CULater wrote:
Wed Mar 14, 2018 6:09 pm

If my numbers are correct, it might make sense to take the maximum additional withdrawal from my taxable this year ($20K)
CULater,

Please note that if you withdraw 20K from the taxable, you do not pay tax on the whole 20K.

A) You only pay tax on the gain. If the cost basis of the 20K is 10K, you only pay tax on the 10K gain.

B) Your tax rate on that 10K is long-term capital gain tax rate. It is lowered than 22%. It is 15% with 22% marginal tax rate.

KlangFool

CULater
Posts: 1310
Joined: Sun Nov 13, 2016 10:59 am

Re: How much to withdraw from Roth vs. tax-deferred in retirement?

Post by CULater » Wed Mar 14, 2018 10:59 pm

KlangFool wrote:
Wed Mar 14, 2018 6:18 pm
CULater wrote:
Wed Mar 14, 2018 6:09 pm

If my numbers are correct, it might make sense to take the maximum additional withdrawal from my taxable this year ($20K)
CULater,

Please note that if you withdraw 20K from the taxable, you do not pay tax on the whole 20K.

A) You only pay tax on the gain. If the cost basis of the 20K is 10K, you only pay tax on the 10K gain.

B) Your tax rate on that 10K is long-term capital gain tax rate. It is lowered than 22%. It is 15% with 22% marginal tax rate.

KlangFool
My mistake. I was referring to withdrawals from my pre-tax retirement accounts. Will have to pay tax on all of it.
May you have the hindsight to know where you've been, The foresight to know where you're going, And the insight to know when you've gone too far. ~ Irish Blessing

Post Reply