Withdrawal Planning

Probably been asked often here and elsewhere and I’m guessing w/o knowing the future you can only take a best guess but…

Using nice round numbers for an example how do people decide where to withdraw money from when retired? Do you create a nice spreadsheet with lots and lots of formulas? (I’m not opposed to that.)

Example Scenario:
$30,000 pension
$20,000 “bridge” money to cover until social security (using round numbers say age 70)
$40,000 withdrawals from accounts (401K, Roth, Taxable)

If we assume the person has $1M in savings (using a 4% SWR, and for those cautious people we will pretend the person has an emergency reserve of $250K elsewhere and shouldn’t be used in this example but provided to avoid questioning the wisdom of 4% SWR).

The $1M is divided as:
$100,000 Roth
$400,000 Taxable
$500,000 401K accounts

I assume the goal is to withdraw enough from the accounts to manage taxes such that you either differ the taxes until later and pay them with inflated money (or is that deflated?) or even things out such as the tax hit is even over the years?

I saw an example on Fidelity that showed the difference between someone taking money evenly from their accounts (until each one ran out) vs. splitting it up and it was a decent sized tax difference.

Any good web sites to use? Or just start crafting that spreadsheet and running numbers? I know a couple filing taxes can have up to $80,400 of capital gains w/o paying on it (I think).

Thanks
Rich

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The only spreadsheet I have is a net worth spreadsheet with a sheet on income scenarios that aren’t about where it comes from, just the possibilities starting when I was about 57 to lay out each year starting at 59.5 to 70.5. What I will have to take as RMDS - whether at 70.5 or 72(at the moment it’s 72 and I’m not) was one of my biggest concerns. There’s another sheet with the Medicare surcharge possibilities - likely a much bigger concern for me as a single person.

For me, what to take when has many moving parts. Also, my income has a stable piece and then some unstable stuff as well.

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There’s another sheet with the Medicare surcharge possibilities - likely a much bigger concern for me as a single person.

How is that possible? IRMAA is likely only a small of your Federal tax liability for higher income earners. The only thing of concern should be the “bend points” which act as a step function (i.e., allowing your income to break into the next bracket by $1 could trigger an extra $1,000 or $2,000 in IRMAA penalties.)

intercst

How is that possible?

Maybe you could read the whole post before responding ?

Also, my income has a stable piece and then some unstable stuff as well.

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Its in your best interest to work down the balance in your 401K accounts at every opportunity. The gains there are taxed at ordinary income tax rates and that eventually must be paid–by your or your heirs. Or you pay taxes on it at your highest rates due to RMDs.

Doing Roth conversions when you can is one way. Spending it for living expenses. One exception might be if your heirs are in lower tax brackets than you are.

Taxable is inherited at stepped up basis meaning they pay no taxes on your gains. That’s even better than paying capital gains rates on it. I’d suggest taxable is your last choice.

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<<How is that possible?>>

Maybe you could read the whole post before responding ?

Also, my income has a stable piece and then some unstable stuff as well.

I read that. Whether your income is stable or not, IRMAA is only going to be a small portion of your tax liability.

That’s why it was so surprising. Unless you’re suffering from some medical condition that makes you unusually “IRMAA intolerant”.

intercst

Taxable is inherited at stepped up basis meaning they pay no taxes on your gains. That’s even better than paying capital gains rates on it. I’d suggest taxable is your last choice. - paulecker


I would make Roth last since your heirs pay no taxes on your gains, PLUS they pay no taxes on another ten years of their gains after that. Think of it as a ten year delay in the step up in basis. I wouldn’t give that up if at all possible.

Agree that paring down the 401K to the extent feasible would be the first choice for covering living expenses or Roth conversion funds.

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The $1M is divided as:
$100,000 Roth
$400,000 Taxable
$500,000 401K accounts

From what a number of FA’s told us, those ratios are out of ordinary. They said that the ratio is typically more like $100K Roth, $200K taxable, $700K 401K/IRA.

To address your question, search on “best order of withdrawal from accounts”.

“Most investment advice suggests that retirees should spend down their taxable assets first (meaning stocks, bank accounts, etc.), tax-deferred assets second (401(k)s, traditional IRAs, etc.), and tax-free accounts last (Roth IRAs, etc.).”

There’s no need to create a spreadsheet.

Also, my income has a stable piece and then some unstable stuff as well.

It’s not too hard to get an unplanned-for capital gain of $20,000 to $50,000. Some mutual funds have sprung that surprise on people. Usually in late December, so you don’t have any time to change your plans.

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Taxable is inherited at stepped up basis meaning they pay no taxes on your gains. That’s even better than paying capital gains rates on it. I’d suggest taxable is your last choice.

Yes, as long as stepped up basis remains the law. But it is such an idiotic law I wouldn’t be surprised to see it go away.

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Engr27:

{{{Taxable is inherited at stepped up basis meaning they pay no taxes on your gains. That’s even better than paying capital gains rates on it. I’d suggest taxable is your last choice.}}}

“Yes, as long as stepped up basis remains the law. But it is such an idiotic law I wouldn’t be surprised to see it go away.”

It went away once before (in the 1980s, IIRC, maybe 1970s [perhaps one of the resident tax pros might recall]) and it created such havoc that it was re-instated relatively quickly.

Perhaps since brokerage houses need to track basis it might be different this time, but I am not certain.

Value on date of death (or alternative date, if elected) is relatively easy to establish for executor and heirs. Basis of drip stock acquired over 20 or 30 years not so much, unless the deceased kept meticulous records and executor can find them.

Regards, JAFO

(PS - though I agree as a policy, it does not help bring equity)

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Safeguard Wealth Management has quite a few YouTube videos on withdrawal strategies
https://www.youtube.com/c/SafeguardWealthManagement

How is that possible? IRMAA is likely only a small of your Federal tax liability for higher income earners. The only thing of concern should be the “bend points” which act as a step function (i.e., allowing your income to break into the next bracket by $1 could trigger an extra $1,000 or $2,000 in IRMAA penalties.)

I would point out that someone who is a widow or widower of a dual income couple that was diligent about retirement savings probably does have a greater possibility of hitting IRMAA limits as a single filer than someone who’s been single their whole life, even if the singleton was also diligent about retirement savings. The widow/er ends up with RMDs from Traditional accounts that had the possibility of starting with a total contribution that was as much as twice as high as the singleton was allowed. Higher starting point, with same market returns, means higher RMDs.

That said, it’s a first world problem.

AJ

  • single her whole life
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AJ485,

- single her whole life

Just want to say a big THANK YOU for the time and energy that you devote to helping others here. You’re not truly single - you’ve got lots of friends here on TMF :wink:

'38Packard

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Its in your best interest to work down the balance in your 401K accounts at every opportunity. The gains there are taxed at ordinary income tax rates and that eventually must be paid–by your or your heirs.

I think one exception to this would be if you retire before Medicare age and are going to need to purchase health insurance through a state exchange until you can get Medicare. You can get some substantial subsidies by keeping your taxable income low (substantial to me at least). Drawing from Roth and taxable accounts would help keep taxable income low.

There’s probably a break-even point beyond which the savings from the subsidies is less than any tax savings from doing it the other way. Has anyone seen a calculation on that?

Since the taxes on the 401k must be paid eventually, does it make a difference when you pay them (assume for this example that tax rates remain constant, since we don’t really know what will happen to them in the future).

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Carpian says: Since the taxes on the 401k must be paid eventually, does it make a difference when you pay them

There is some assumption here for planning purposes that the draws are even and that the budget is completely homogeneous from year to year.

This is not usually the case.

Variation in the non-fixed portion of the budget can allow for considerable opportunity to take advantage of allowable gaps between the fixed budget minimum and the allowable additional draw to the next tax bracket.

Looking at this carefully on at least an annual basis is not only prudent, it may allow for a nice stepped up basis for taxable accounts, it could conceivably enable ‘conversions’ of a large 401k or TIRA which is far in excess of what is truly needed for any individual year.

The tax free line for MFJ is~$105K or so. If fixed costs are far below this, a “conversion” or withdrawal is mandatory or you would be leaving money (in taxes) on the table.

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(assume for this example that tax rates remain constant, since we don’t really know what will happen to them in the future). - Carpian


I think there is a greater likelihood of taxes trending up over the long run, government appetite for spending being what it is. Exploiting the tax codes as they exist in the present is probably a better strategy than maintaining a status quo for years or decades waiting for rates to drop. Anyway, that is why I am being aggressive with Roth Conversions before the rates pop up as they are programmed to do in a few years. YMMV.

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The ACA.subsidy has been 15 to 18 k for us. Definitely worth altering the sequence of withdrawals.

JK

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Since the taxes on the 401k must be paid eventually, does it make a difference when you pay them (assume for this example that tax rates remain constant, since we don’t really know what will happen to them in the future).

Except we do know that under current law, tax rates are going to revert to the previously higher rates. I don’t know about you, but I’m not convinced that Congress wil have enough of their stuff together to make changes by then.

AJ

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Awww, thanks (blushing). And I’m really only single from a legal/tax perspective. Joel and I have remained stubbornly unmarried for almost 17 years now, after meeting through TMF.

AJ

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AJ explains,

I would point out that someone who is a widow or widower of a dual income couple that was diligent about retirement savings probably does have a greater possibility of hitting IRMAA limits as a single filer than someone who’s been single their whole life, even if the singleton was also diligent about retirement savings. The widow/er ends up with RMDs from Traditional accounts that had the possibility of starting with a total contribution that was as much as twice as high as the singleton was allowed. Higher starting point, with same market returns, means higher RMDs.

The tax on the RMDs (plus whatever other income you have) is going to be ten times the IRMAA penalty whether you’re single, married or widowed. It’s letting the tail wag the dog if IRMAA is your focus.

intercst

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