Author Topic: Mechanics of Spending Different Buckets o' Cash  (Read 3682 times)

Acastus

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Mechanics of Spending Different Buckets o' Cash
« on: June 13, 2017, 02:08:34 PM »
I am approaching FIRE in mid 50's, and I have money in taxable, IRA, Roth IRA, and 401k. I am looking for advice and critique on which accounts to spend in what order. How much money do you keep in cash/bonds to spend in a market downturn?

Here is my current plan:

Age 56 to 59.5 - Spend taxable and 401k money in the same ratio as the current account balances. Keep these monies mostly in bonds and cash, with maybe 30 to 40% stock. Increase stock holdings in IRAs to keep overall ratio 60% stock.

Use 529 plus Roth IRA contribution amount to fund, or partially fund, son's college. How much to fund depends on cost, as he is at least 2 years away, possibly 3 if he takes a skip year. Figure out when to down size house and where to relocate so we can do geographical arbitrage. This depends on parents' health.

Age 59.5 to 65ish - This opens up IRAs. Spend mostly IRA and taxable accounts. Supplement with Roths as needed. Do some Roth conversion as healthcare subsidies allow.

Age 65+ - Social Security funds 50 to 60% of costs. Switch to Medicare. Fund the rest with IRA / Roth ladder to keep taxes in the 15% bracket.

Mr. Green

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Re: Mechanics of Spending Different Buckets o' Cash
« Reply #1 on: June 13, 2017, 04:11:04 PM »
Would you have enough money in after-tax accounts to fund your expenses through 59.5? Why withdraw funds from retirement accounts before 59.5 and pay the 10% penalty if you don't have to?

You may also want to consider converting your 401k(s) to IRA(s) once you stop working. Once the money is in a traditional IRA, you can use the tax code to your advantage by converting funds from a traditional IRA to a roth IRA without having to pay federal tax (by being in the lowest tax bracket). I'm not sure what you plan to do for healthcare before you're eligible for Medicare but generating "income" via roth IRA conversions may also be an option that would allow you to put yourself in the best position to have affordable healthcare.
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CanuckExpat

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Re: Mechanics of Spending Different Buckets o' Cash
« Reply #2 on: June 14, 2017, 12:05:58 AM »
Do you get a state tax deduction for the 529 contribution? If not, I wouldn't generally recommend, unless you have specific reasons (or need a forced savings vehicle)

You said mid 50s? You may be able to access your current employers funds penalty free if you retire on or after the year you turn 55. Worth checking that option if it lines up with your timeframe.
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Acastus

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Re: Mechanics of Spending Different Buckets o' Cash
« Reply #3 on: June 14, 2017, 07:26:34 AM »
Mr. Green,

I should have enough in taxable and 401k combined to fund my life until at least 60. I will leave my company after age 55, so the 401k will have no penalty, just regular taxes. Because of this little known feature, I do not plan to convert this 401k as I have previous ones. I expect reportable income to be lower than withdrawals, since the mix of assets will be partially taxable and some will be capital gains at 0% tax.

CanuckExpat,

I did get state tax deduction for the 529. I live in NY, which is a high tax state. I am not completely sold on these plans either.

Mr. Green

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Re: Mechanics of Spending Different Buckets o' Cash
« Reply #4 on: June 14, 2017, 08:54:25 AM »
I should have enough in taxable and 401k combined to fund my life until at least 60. I will leave my company after age 55, so the 401k will have no penalty, just regular taxes. Because of this little known feature, I do not plan to convert this 401k as I have previous ones. I expect reportable income to be lower than withdrawals, since the mix of assets will be partially taxable and some will be capital gains at 0% tax.
Ah nice! I was definitely not thinking about that possibility.
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Car Jack

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Re: Mechanics of Spending Different Buckets o' Cash
« Reply #5 on: June 15, 2017, 11:35:45 AM »
This is the time to start looking over the FAFSA form and study it and do some practice runs and fully understand how your income and assets, and your son's income and assets affect your chance to get financial aid.  Understand that FAFSA now looks at your tax forms from 2 years ago.  So converting as much of your taxable assets into retirement accounts is important.  Also, as mentioned, 529's can really screw this all up because that's a parent asset.  I'd spend that down as quickly as possible, like the first year that your son is in college.  I might even consider spending it now and just take the penalty (I believe it's only on the gain...).  Remember that anything you make....or own above the poverty level works against you, besides your house and retirement accounts.  I'd also agree to move as you're able as much from tIRA and 401k into Roth since your tax bracket should be as low as it gets.

Acastus

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Re: Mechanics of Spending Different Buckets o' Cash
« Reply #6 on: June 15, 2017, 02:38:21 PM »
Car Jack,

This has been in the back of my mind for a while. I filled out a FAFSA for myself about 10 years ago, as I was wrapping up a MS degree. Stafford loans were handy. At that time, 529 counted as student income, but just the amount that was cashed in the previous year(s). Is that still true, or did they change it?

I don't expect us to qualify for Federal grants, but we should qualify for loans if we need them. Lower retired status might help, but I got the impression that income at 50k+ pretty much nixed any aid, at least for public schools. Private might be another story. If the kid chooses a good public college, I think we are fine, even if it is all self pay.


jim555

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Re: Mechanics of Spending Different Buckets o' Cash
« Reply #7 on: June 18, 2017, 11:25:35 AM »
Also don't forget to factor in the ACA when withdrawing or converting retirement accounts.
We may not need to worry about this soon. 

Acastus

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Re: Mechanics of Spending Different Buckets o' Cash
« Reply #8 on: June 21, 2017, 12:13:42 PM »
I would think you would want to spend down your taxable account t first before touching your 401K because you can allow the 401k to grow tax-free.  Then when you are 5 years away from running out of taxable funds you could start the Roth pipeline with your traditional IRA.  It depends also on how your assets are allocated in different accounts too. If you want to maintain or gradually change your asset allocation as you age (e.g. Higher bond and lower stock percentage) you may need to spend 401k before your taxable to achieve your desired allocation.

I want to make sure I have at least 25k in taxable income to use all of the standard deduction and exemptions. Spending the 401k slowly satisfies this. Other money from taxable accounts will be partially non-taxable and partially capital gains, so the tax will be zero.

Jim, I doubt I will exceed 80k income in the near future, but thanks for the tip on ACA headspace.

markbike528CBX

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Re: Mechanics of Spending Different Buckets o' Cash
« Reply #9 on: July 22, 2017, 06:32:03 AM »
I would think you would want to spend down your taxable account t first before touching your 401K because you can allow the 401k to grow tax-free.  Then when you are 5 years away from running out of taxable funds you could start the Roth pipeline with your traditional IRA.  It depends also on how your assets are allocated in different accounts too. If you want to maintain or gradually change your asset allocation as you age (e.g. Higher bond and lower stock percentage) you may need to spend 401k before your taxable to achieve your desired allocation.

I want to make sure I have at least 25k in taxable income to use all of the standard deduction and exemptions. Spending the 401k slowly satisfies this. Other money from taxable accounts will be partially non-taxable and partially capital gains, so the tax will be zero.

Jim, I doubt I will exceed 80k income in the near future, but thanks for the tip on ACA headspace.

I am also thinking SEPP/72(t) from a traditional IRA to fill the taxable space ~$20K.   
My 401(k) won't allow partial withdrawals at my FIRE age.

Why do many ( exemplified above by SachaFiscal ) assume all taxable use pre-59.5years of age?
I'm assuming SachaFiscal's statement is not made from a lack of knowledge, as SachaFiscal speaks correctly of the Roth pipeline, a trickier setup than a SEPP/72(t).

Acastus

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Re: Mechanics of Spending Different Buckets o' Cash
« Reply #10 on: July 25, 2017, 08:32:12 AM »
I have shied away from the 72(t) substantially equal payments. The main issue for me is that payments must be made for 5 years or until age 59.5, whichever is longer. That eliminates a lot of flexibility. The IRS makes you take an extra safe withdrawal rate, currently around 2%.  Several sources say there are pitfalls in setting up the income stream properly. If you withdraw the wrong amount 1 year, the entire set of multi-year payments are subject to 10% penalty. If your situation changes and you need or want to go back to work, too bad. You need to keep taking the payments.

I would consider this as a supplement other income streams, but for me, there are too many limitations to make this the primary income stream.

markbike528CBX

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Re: Mechanics of Spending Different Buckets o' Cash
« Reply #11 on: July 25, 2017, 09:28:58 AM »
.....snip....The IRS makes you take an extra safe withdrawal rate, currently around 2%.  .........snip...

I would consider this as a supplement other income streams, but for me, there are too many limitations to make this the primary income stream.

the IRS LIMITS to less than around 2% interest rate (120% of IRS benchmark) for the calculation,  this is not a withdrawal rate.

The IRS does not MAKE you do any withdrawals, but what ever withdrawal amount you choose, it must remain constant for the rest of the time you are under the rules (<59.5 age OR <5 years) . 

If  I read it correctly it's per eligible account , not all tax-deferred assets.

As you noted its just for filling taxable deductions space.

As Acastus noted below, having the exact amount you need in the account to give you your desired withdrawal amount is helpful.   You can have any interest rate up to 120% of some IRS benchmark, so you can fine tune the amount that way also.

Edited for clarity (hopefully).
« Last Edit: July 26, 2017, 09:53:59 AM by markbike528CBX »

Acastus

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Re: Mechanics of Spending Different Buckets o' Cash
« Reply #12 on: July 26, 2017, 09:38:22 AM »
I think the "substantially equal payments" part of the rules means you choose a withdrawal amount at the beginning and stick with that for the duration. I do not think you need to take monthly payments, but the annual payments need to be the same. Most of my reading has recommended packaging the exact portion of 'stache you need to yield the desired payment into a designated account. There are limits on what else you can do with the designated account. It is not eligible for Roth conversions, for example.