Order to withdrawing from assets during retirement

[Planner01]

I have seen information on what funds to withdraw from in a specific order for tax efficiency purposes during retirement. If you have it, please share it with me.

Thank you in advance!

[livesoft]

Before RMD time, we are withdrawing from taxable by selling equities and then rebalancing in tax-deferred. We are also doing Roth conversions from tax-deferred to Roths and then rebalancing in tax-deferred.

After RMD time, I expect we will withdraw the RMDs and either spend them as needed and invest any of the leftovers back into taxable account. If we need more money for expenses we will have to decide which of (a) tax-deferred, (b) taxable, or (c) Roth accounts we should sell from. Maybe all 3 in the same year depending on our tax situation. Plus doing more Roth conversions could happen as well.

Bottom line: Everybody is different. There is no one order for everybody. And withdrawing from multiple and different kinds of accounts can be best or worst.

[Sheepdog]

Bottom line: Everybody is different. There is no one order for everybody. And withdrawing from multiple and different kinds of accounts can be best or worst.

Agree with livesoft,
This was my withdrawal system when I retired in 1998 at age 65. I was to live off of investments and Social Security . No pension. I was to try to reduce taxes with the withdrawal plan.
1. Used taxable accounts first and I used those until 70.5 and RMDs required.
2. I then took my RMDs and I continued to take taxable until they were reduced to the point where the taxable remainder would be my emergency funds (equities were mostly gone.). The RMDs were in proportion to maintain my allocation within the IRAs. (Note that I had a plan to reduce my stock percentage gradually as I got older.)
And I also did some low amount conversions to Roths over the years, almost every year, and I still am in my 21st year in retirement.

As I said, we are all different.

[12thKnight]

I have seen information on what funds to withdraw from in a specific order for tax efficiency purposes during retirement. If you have it, please share it with me.

Thank you in advance!

There was an excellent white paper years ago from Vanguard titled "Spending from a Portfolio: Implications of Withdrawal Order for Taxable Investors" by Colleen Jaconetti and Maria Bruno. Their white paper has apparently been removed from Vanguard's site, but one of the authors discusses the paper's findings here: https://riabiz.com/a/2015/6/12/why-prop ... nt-savings

Hope this helps!

[Planner01]

This is exactly what I was looking for. Thanks again!

[BolderBoy]

Bottom line: Everybody is different.

Well, not everybody. I do what you do.

[fyre4ce]

Edit: Did a little research and this seems like a reasonable order of withdrawal:

1) Required minimum distributions (RMDs) - Penalties for not taking these are huge, so take them and spend this money first. Your first RMD can be delayed to April 1 of the following year, but that's probably a bad idea because you'll end up with two RMDs that year.
2) Taxable income - Social Security payments, pensions, annuity income, rental income, royalty income, income from part-time work, etc.
3) Investment income - switch off the automatic reinvestment of interest/dividends/capital gains for all your taxable investments, and spend it.
4) 457b distributions - This money doesn't legally belong to you until you take it, so preferentially draw from 457b in retirement.
5) Health Savings Accounts (HSAs) - The estate planning value of HSAs is inferior to taxable accounts and IRAs, so spend HSA money next. First, on current medical expenses, then on prior medical expenses for which you've saved receipts, and then taking taxable withdrawals like a traditional IRA if you are 65 or older.
6) High-basis taxable investments - This is money sitting around that you can tap for relatively little tax consequence, and will preserve the more desirable assets in #7.
7) Blend of low-basis taxable investments, pre-tax (traditional) accounts, and Roth accounts - It depends somewhat on the situation, but I like the idea of picking a tax bracket threshold that makes sense for you (eg. the 12%/22% boundary at $78,950 for couples) and taking taxable withdrawals up to this level, then Roth withdrawals above. It's good to preserve low-basis investments for one's estate due to the step-up in basis, but if you can take long-term capital gains at 0% then it's worth considering. Also, if your prospective heirs have a higher tax rate than you, preferentially spend traditional money, and if they have a lower tax rate, preferentially spend Roth.
8) Whole life insurance - likely should never have been bought in the first place, but if you have it, it's probably best to use it as life insurance and treat it as part of your estate, especially if the policy is direct recognition
9) Tapping home equity, either by downsizing (although this could make sense on its own, even if you're not trying to tap equity), a second mortgage/HELOC, or with a reverse mortgage (which I'm not a fan of, but I admit could make sense in some cases)

My spin on info from this podcast: https://www.whitecoatinvestor.com/neari ... l_Strategy

[grabiner]

5) Health Savings Accounts (HSAs) - The estate planning value of HSAs is inferior to taxable accounts and IRAs, so spend HSA money next. First, on current medical expenses, then on prior medical expenses for which you've saved receipts, and then taking taxable withdrawals like a traditional IRA if you are 65 or older.

Don't take taxable withdrawals from an HSA if you don't need to. You are likely to have medical expenses in the future, and if you don't, it is no worse to take a withdrawal from an IRA this year and a taxable withdrawal from an HSA next year than the other way around. (There is a disadvantage if you die with a large HSA balance; the HSA becomes taxable in full upon your death, while IRA withdrawals are also taxable but can be spread over years.)

[fyre4ce]

5) Health Savings Accounts (HSAs) - The estate planning value of HSAs is inferior to taxable accounts and IRAs, so spend HSA money next. First, on current medical expenses, then on prior medical expenses for which you've saved receipts, and then taking taxable withdrawals like a traditional IRA if you are 65 or older.

Don't take taxable withdrawals from an HSA if you don't need to. You are likely to have medical expenses in the future, and if you don't, it is no worse to take a withdrawal from an IRA this year and a taxable withdrawal from an HSA next year than the other way around. (There is a disadvantage if you die with a large HSA balance; the HSA becomes taxable in full upon your death, while IRA withdrawals are also taxable but can be spread over years.)

My thinking is that it’s better to whittle away at the HSA during retirement and try to preserve the IRA due to the stretch IRA. Obviously, this is a lot harder if you don’t know the date (or year) of your death decades in advance.

Maybe a reasonable plan is to consider your health and life expectancy and aim to spend down the HSA over your life expectancy going forward, maybe padded by a few years? That would put taxable HSA withdrawals between 7 and 8 for someone in good health, and between 6 and 7 for someone in declining health.

[Wiggums]

I have seen information on what funds to withdraw from in a specific order for tax efficiency purposes during retirement. If you have it, please share it with me.

Thank you in advance!

https://investornews.vanguard/your-inve ... t-savings/

[smitcat]

I have seen information on what funds to withdraw from in a specific order for tax efficiency purposes during retirement. If you have it, please share it with me.

Thank you in advance!

This is the most concise article with charts that I have read so far....
https://www.kitces.com/blog/tax-efficie ... ing-needs/