Decumulation Advice Needed

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HappyJack
Posts: 266
Joined: Thu Jan 10, 2019 7:45 am

Decumulation Advice Needed

Post by HappyJack »

Help.
Just retired at age 68 and my first decumulation withdrawal is on June 1.
Where to pull from?
1. 80% of my portfolio as in tax deferred both total stock and TIPS ETF’s.
2. 20% of my portfolio is in taxable. VTI has done well and qualifies as LTCG. I have some bonds there also that I could sell as a tax loss. I tax loss harvested previously and have some ability to balance out the gains if I sell VTI.
3. In the next four years I need to look at converting this large tax deferred portfolio into a Roth and I was thinking I might need some of my taxable side for that.

Should I sell from the tax deferred (pay the taxes) and save the taxable funds in case I need them to do Roth conversions in the future? This would also help lower my future RMD’s.

Or is there another set of priorities I nerd to consider?

Thank you for any guidance you can give me on this process.
terran
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Joined: Sat Jan 10, 2015 10:50 pm

Re: Decumulation Advice Needed

Post by terran »

I tend to think it's best to keep money in tax advantaged accounts as long as possible, so that's taxable is probably what I'd spend from first. The exception to that might be if you expect to leave a significant amount of what you have to heirs in which case leaving the taxable investments untouched with the hope that they get stepped up basis and no one ever pays capital gains taxes.

Where you withdraw from doesn't need to have anything to do with Roth conversions though, and you're right you probably should look at doing those both before social security if you're delaying and before RMDs. You want to try to keep you taxable income as even as possible, so converting up to the top of your expected marginal tax bracket once RMDs start likely makes sense.
Last edited by terran on Sun May 02, 2021 2:41 pm, edited 1 time in total.
02nz
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Re: Decumulation Advice Needed

Post by 02nz »

terran wrote: Sun May 02, 2021 2:17 pm I tend to think it's best to keep money in tax advantaged accounts as long as possible, so that's probably what I'd spend from first...
I'm guessing you meant to say that you'd spend from taxable accounts first. That's the standard advice, but there are lot of factors that can change that. Broadly, you want to even out income (and taxes), as you noted.
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HappyJack
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Re: Decumulation Advice Needed

Post by HappyJack »

O2nz
So spend from taxable and leave tax deferred to grow.
My problem then would be if I do try to do some Roth conversions later I will need those taxable funds to pay the taxes. Not sure which way to move on this. Maybe some funds from both taxable and tax deferred and call it good?
terran
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Re: Decumulation Advice Needed

Post by terran »

02nz wrote: Sun May 02, 2021 2:30 pm
terran wrote: Sun May 02, 2021 2:17 pm I tend to think it's best to keep money in tax advantaged accounts as long as possible, so that's probably what I'd spend from first...
I'm guessing you meant to say that you'd spend from taxable accounts first. That's the standard advice, but there are lot of factors that can change that. Broadly, you want to even out income (and taxes), as you noted.
Yes, I must have lost my train of thought as I was writing.
terran
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Re: Decumulation Advice Needed

Post by terran »

HappyJack wrote: Sun May 02, 2021 2:39 pm O2nz
So spend from taxable and leave tax deferred to grow.
My problem then would be if I do try to do some Roth conversions later I will need those taxable funds to pay the taxes. Not sure which way to move on this. Maybe some funds from both taxable and tax deferred and call it good?
I think what you're missing is that getting money out of tax deferred and where your spending money comes from (including money to pay taxes) are two separate decisions. You could spend from tax deferred and leave taxable untouched or you could spend from taxable and convert from tax deferred to Roth. Both get money out of tax deferred, but the former results in lower tax advantaged balances (lower Roth in this case) while the latter results in lower taxable balances and higher Roth.
sparky123
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Re: Decumulation Advice Needed

Post by sparky123 »

Minimize total taxes. It's not how much you make, it's how much you keep. Draw from both sources so as to minimize overall taxes.
https://www.kitces.com/blog/tax-efficie ... ing-needs/
JediMisty
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Re: Decumulation Advice Needed

Post by JediMisty »

HappyJack wrote: Sun May 02, 2021 2:06 pm Help.
Just retired at age 68 and my first decumulation withdrawal is on June 1.
Where to pull from?
1. 80% of my portfolio as in tax deferred both total stock and TIPS ETF’s.
2. 20% of my portfolio is in taxable. VTI has done well and qualifies as LTCG. I have some bonds there also that I could sell as a tax loss. I tax loss harvested previously and have some ability to balance out the gains if I sell VTI.
3. In the next four years I need to look at converting this large tax deferred portfolio into a Roth and I was thinking I might need some of my taxable side for that.

Should I sell from the tax deferred (pay the taxes) and save the taxable funds in case I need them to do Roth conversions in the future? This would also help lower my future RMD’s.

Or is there another set of priorities I nerd to consider?

Thank you for any guidance you can give me on this process.
Well, you could sell your taxable, keeping in mind that you only pay taxes on the gains. "Harvest" those gains so that you stay in the "0" capital gains bracket, even if the proceeds are more than you need. Once the gains are all harvested, you may have enough proceeds left to pay taxes the next year on Roth conversions. I'm sure there are people here who can direct you to articles explaining the mechanics of this plan better than I have...
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Peter Foley
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Re: Decumulation Advice Needed

Post by Peter Foley »

sparky123 is on the right track.

You don't provide enough information to offer concrete advice. What is your other income? What is your marginal tax rate? Are you deferring SS benefits? Do you expect a higher tax rate when RMDs hits. What is your approximate tax deferred balance? What are your expense needs from savings? Are you close to the IRMAA thresholds?

The "answer" usually involves a mix of withdrawals from accounts (plural) and Roth conversions that minimize taxes over time.
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Re: Decumulation Advice Needed

Post by LadyGeek »

This thread is now in the Personal Finance (Not Investing) forum (retirement withdrawal strategy)
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