Author Topic: Generic withdrawal order List - Rules of Thumb  (Read 2152 times)

BlueHouse

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Generic withdrawal order List - Rules of Thumb
« on: August 25, 2016, 10:26:05 AM »
MDM's post on the "Generic Investment Order rules of thumb" has been of great help. 
http://forum.mrmoneymustache.com/investor-alley/401k-roth-then-what-50705/msg965668/#msg965668

Quote from: MDM
Generic investment order rules of thumb:

WHAT   
0. Establish an emergency fund to your satisfaction   
1. Contribute to 401k up to any company match   
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.   
3. Max HSA    
4. Max Traditional IRA or Roth (or backdoor Roth) based on income level   
5. Max 401k (if 401k fees are lower than available in an IRA, or if you need the 401k deduction to be eligible for a tIRA, swap #4 and #5)   
6. Fund mega backdoor Roth if applicable   
7. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield.   
8. Invest in a taxable account with any extra.   
   
WHY   
0. Give yourself at least enough buffer to avoid worries about bouncing checks   
1. Company match rates are likely the highest percent return you can get on your money   
2. When the guaranteed return is this high, take it.   
3. HSA funds are totally tax free when used for medical expenses, making the HSA better than either traditional or Roth IRAs.   
4. Rule of thumb: traditional if current marginal rate is 25% or higher; Roth if 10% or lower; flip a coin in between (or see   
   http://forum.mrmoneymustache.com/investor-alley/deciding-between-roth-and-traditional-ira-based-on-marginal-tax-rate/
   if you want even more details on that topic).  See also
   https://www.bogleheads.org/forum/viewtopic.php?f=2&t=182081,
   http://forum.mrmoneymustache.com/ask-a-mustachian/case-study-overwhelming-student-loan-debt-how-would-you-get-started/msg868845/#msg868845
   and other posts in that thread about exceptions to the rule.
5. See #4 for choice of traditional or Roth for 401k   
6. Applicability depends on the rules for the specific 401k   
7. Again, take the risk-free return if high enough   
8. Because earnings, even if taxed, are beneficial   

Is there a similar list for withdrawing?  I would like to optimize my withdrawals to minimize taxes.   

I know it will be different depending on age of retirement benefits, tax bracket, etc., I'm just looking for the general framework to start planning drawdowns from different tax-advantaged and taxable accounts.

sisto

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Re: Generic withdrawal order List - Rules of Thumb
« Reply #1 on: August 25, 2016, 01:36:19 PM »
You bring us a very interesting question. I think there are going to be way too many variables to create a generic list like MDM created before. This is definitely something I also think about too. Age is going to be a big variable to determine how you are accessing pre-tax accounts or whether or not you do a ROTH ladder. Then you need to consider how much you supplement your income with taxable accounts since you only need to claim the gains. The right combination I think will be slightly different for everyone. I'm curious to see some answers to this question though.

Lucky Girl

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Re: Generic withdrawal order List - Rules of Thumb
« Reply #2 on: August 25, 2016, 01:53:47 PM »
I'm definitely not going to claim I have this figured out, but I'm going to take a crack at it and let other experts correct me to get the ball rolling!

I think it has to be split by age at least so:

Under 59.5 (or under 55 if retired from company holding 401(k)):
1.  HSA for all medical spending in the year
2.  Dividends from taxable accounts (since you pay tax on them anyway)
3.  Roth IRA contributions available
4. Taxable accounts, with goal of rebalancing to target asset allocation
5.  If still don't have needed income, consider SEPP 72(t) or taking 10% hit on straight 401(k)/IRA withrdrawal
6.  perform any possible conversions from 401(k) to Roth

At Age 59.5-70.5:
1.  HSA for all medical spending in the year
2.  Dividends from taxable accounts
3.  401(k)/IRA to get money out before RMD's if you face substantial tax consequences at 70.5
4.  Taxable accounts

At Age 70.5
1.  RMDs from 401(k)/IRA
2.  HSA for medical spending
3.  Dividends
4.  Not sure where the priority would be at this point--tax situations will vary

Okay mustachians, how can this be improved?

tonysemail

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Re: Generic withdrawal order List - Rules of Thumb
« Reply #3 on: August 25, 2016, 02:44:25 PM »
MDM pointed me towards http://www.i-orp.com/ which I found to be very useful.
for my case, the drawdown strategy was to deplete the taxable accounts before taking out roth contributions.
that's probably optimized for taxes to avoid accruing large capital gains in your taxable account.

Gin1984

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Re: Generic withdrawal order List - Rules of Thumb
« Reply #4 on: August 25, 2016, 02:46:33 PM »
I'm definitely not going to claim I have this figured out, but I'm going to take a crack at it and let other experts correct me to get the ball rolling!

I think it has to be split by age at least so:

Under 59.5 (or under 55 if retired from company holding 401(k)):
1.  HSA for all medical spending in the year
2.  Dividends from taxable accounts (since you pay tax on them anyway)
3.  Roth IRA contributions available
4. Taxable accounts, with goal of rebalancing to target asset allocation
5.  If still don't have needed income, consider SEPP 72(t) or taking 10% hit on straight 401(k)/IRA withrdrawal
6.  perform any possible conversions from 401(k) to Roth

At Age 59.5-70.5:
1.  HSA for all medical spending in the year
2.  Dividends from taxable accounts
3.  401(k)/IRA to get money out before RMD's if you face substantial tax consequences at 70.5
4.  Taxable accounts

At Age 70.5
1.  RMDs from 401(k)/IRA
2.  HSA for medical spending
3.  Dividends
4.  Not sure where the priority would be at this point--tax situations will vary

Okay mustachians, how can this be improved?
You can also pull from your HSA from previous years medical expenses. 

seattlecyclone

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Re: Generic withdrawal order List - Rules of Thumb
« Reply #5 on: August 25, 2016, 02:57:20 PM »
I wouldn't say a strict ordering would even make sense for most people. For tax purposes it's generally optimal to keep your income as consistent as possible from year to year. Achieving this in retirement would generally require taking a bit from Roth, traditional, and taxable each year and sticking with that plan. Certain things (Obamacare subsidies, social security, pensions, RMDs from retirement accounts) might make it so that in your situation it's better to do one ratio of withdrawals for a certain period of retirement and then switching to a different ratio when a particular event happens.

Catbert

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Re: Generic withdrawal order List - Rules of Thumb
« Reply #6 on: August 25, 2016, 04:12:26 PM »
I wouldn't say a strict ordering would even make sense for most people. For tax purposes it's generally optimal to keep your income as consistent as possible from year to year. Achieving this in retirement would generally require taking a bit from Roth, traditional, and taxable each year and sticking with that plan. Certain things (Obamacare subsidies, social security, pensions, RMDs from retirement accounts) might make it so that in your situation it's better to do one ratio of withdrawals for a certain period of retirement and then switching to a different ratio when a particular event happens.

Yep, what seattlecyclone said. 

BlueHouse

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Re: Generic withdrawal order List - Rules of Thumb
« Reply #7 on: August 26, 2016, 01:09:38 PM »
I'm definitely not going to claim I have this figured out, but I'm going to take a crack at it and let other experts correct me to get the ball rolling!

I think it has to be split by age at least so:

Under 59.5 (or under 55 if retired from company holding 401(k)):
1.  HSA for all medical spending in the year
2.  Dividends from taxable accounts (since you pay tax on them anyway)
3.  Roth IRA contributions available
4. Taxable accounts, with goal of rebalancing to target asset allocation
5.  If still don't have needed income, consider SEPP 72(t) or taking 10% hit on straight 401(k)/IRA withrdrawal
6.  perform any possible conversions from 401(k) to Roth

At Age 59.5-70.5:
1.  HSA for all medical spending in the year
2.  Dividends from taxable accounts
3.  401(k)/IRA to get money out before RMD's if you face substantial tax consequences at 70.5
4.  Taxable accounts

At Age 70.5
1.  RMDs from 401(k)/IRA
2.  HSA for medical spending
3.  Dividends
4.  Not sure where the priority would be at this point--tax situations will vary

Okay mustachians, how can this be improved?

This is great Lucky Girl.  I know it doesn't apply to everyone equally, but it's a great start.  I completely forgot about HSA! 
Thank you!