Author Topic: So ... How do I actually take it out?  (Read 4738 times)

BigBangWeary

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So ... How do I actually take it out?
« on: August 30, 2016, 05:14:38 AM »
Ok, this is may be a bit of a NOOB question, but once you have accumulated your $XXXXXXXX portfolio and are ready to implement the 4% or 3% or 3.5% rule, whatever your poison, how does one actually do this?

Do you skim interest, dividends, or capital gains off each month? Do you do this at the beginning or end of a tax year? Do you just withdraw the amount in cash from your holdings?

I am sure this is really obvious, but I guess not to me. As we accumulate more I am thinking more about this eventual shift, and I clearly don't have a handle on it. Can anyone explain to me how this would work practically speaking?

I am Canadian, but would still appreciate any general information from those who are not in the same tax/fiscal paradigm as we Canucks.

Frankies Girl

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Re: So ... How do I actually take it out?
« Reply #1 on: August 30, 2016, 05:51:09 AM »
Short answer... yes. To all of the suggested ways.

Long answer... it depends on how much you need, what taxable bracket you'll end up in, what sort of accounts you'll have access to and a few other subtle differentials that need to be considered.

I'm not sure how the Canadian systems work, so someone else will have to chime in on that. I use TurboTax's taxcaster to estimate my drawdowns from various accounts with an eye on keeping the actual tax hit as small as possible. I'm in the 10-15% taxable and likely to remain there, so I owe no taxes on cap gains and dividends.

In my case, I have a tax deferred accounts (traditional IRAs), after tax accounts (Roth IRAs), a taxable account, and an inherited IRA in addition to a cash buffer. Sometimes I'll use the cash and let everything reinvest (if market is really depressed). More than likely over the next decade or so, I'll be using my inherited IRA as my main living expenses (selling off some funds as needed once a quarter) and then topping up the remainder from my taxable account's dividends as they are produced (which in my case, happens in April and December). 

Other folks might sell off funds monthly from one account. Some folks pull all their yearly expenses once a year from several accounts. There's no right way - just what works for you (the most tax efficient way to access funds), and how you have your assets arranged. The frequency of withdrawals is totally up to you.

boarder42

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Re: So ... How do I actually take it out?
« Reply #2 on: August 30, 2016, 06:08:05 AM »
yeah as frankies girl said there are lots of ways and it varies depending on your accounts.

making a listing of your accounts and what you plan to have in them may help other forum members from canada optimize your withdrawal strategy.

for me i'll have over 90% in tax deferred accounts which means i'll have to use SEP 72t or a roth ladder here in the US.  or just pay the 10% penalty (highly unlikely)  and selling of shares is how we'll do it likely monthly. in addition to not DRIPing dividends anymore.

Nick_Miller

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Re: So ... How do I actually take it out?
« Reply #3 on: August 30, 2016, 07:07:02 AM »
BigBangWeary, you aren't the only person wondering that! Thanks for posting the question!

lthenderson

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Re: So ... How do I actually take it out?
« Reply #4 on: August 30, 2016, 08:01:47 AM »
I suggest reading Boglehead's Guide to Retirement Planning.

https://www.amazon.com/Bogleheads-Guide-Retirement-Planning/dp/0470919019/ref=sr_1_1?ie=UTF8&qid=1472565651&sr=8-1&keywords=bogelheads+guide+to+retirement

It discusses this very subject in great detail along with tax efficiency strategies depending on the specifics of your situation.

Axecleaver

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Re: So ... How do I actually take it out?
« Reply #5 on: August 30, 2016, 10:55:43 AM »
The phrase you're looking for is "drawdown strategies." There's lots of them.

I like Nords's strategy of keeping two years of cash in three-year CDs. The first year you buy a two and a three year CD, and keep a year in cash. Every year after that, one of them matures. If the market is down over 10%, you let your investments recover. If the market isn't down, you withdraw another year of cash and buy a new three year CD with it, and cash in the oldest CD to cover spending.

Source: http://forum.mrmoneymustache.com/post-fire/what-has-workednot-worked-for-you-guys-who-have-been-fire-for-10-yrs/msg700740/#msg700740

dividendman

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Re: So ... How do I actually take it out?
« Reply #6 on: August 30, 2016, 11:02:23 AM »
This dude also has a pretty good site: https://livingafi.com/2014/05/18/drawdown-part-3-strategy/

The whole site is amazing but the drawdown article is pertinent to this thread.

EDIT: It's US based though.

neo von retorch

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Re: So ... How do I actually take it out?
« Reply #7 on: August 30, 2016, 12:03:30 PM »
A few questions:
 * When you move "funds" from a tIRA to a Roth IRA, do you liquidate and repurchase assets, or are they "merely recharacterized" (and then you pay taxes from your liquid funds)?
 * When you withdraw "funds" from a Roth IRA, do you sell according to your asset allocation (i.e. stocks are currently doing better than bonds and have grown to be higher than your desired allocation, so you take more of them to even things out?)

dividendman

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Re: So ... How do I actually take it out?
« Reply #8 on: August 30, 2016, 12:06:23 PM »
A few questions:
 * When you move "funds" from a tIRA to a Roth IRA, do you liquidate and repurchase assets, or are they "merely recharacterized" (and then you pay taxes from your liquid funds)?
 * When you withdraw "funds" from a Roth IRA, do you sell according to your asset allocation (i.e. stocks are currently doing better than bonds and have grown to be higher than your desired allocation, so you take more of them to even things out?)

for the first point, it's up to you. you can do an "in kind" transfer of the actual securities, or you can liquidate and move cash. you never have to pay taxes for selling because IRAs are tax sheltered
for the second point, that's what i would do

neo von retorch

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Re: So ... How do I actually take it out?
« Reply #9 on: August 30, 2016, 12:07:57 PM »
Well no, if you re-characterize from tIRA to Roth, while you're not "selling" if you do an "in kind" transfer - you are "taking income" so you do (potentially) pay taxes.

dividendman

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Re: So ... How do I actually take it out?
« Reply #10 on: August 30, 2016, 12:25:59 PM »
Well no, if you re-characterize from tIRA to Roth, while you're not "selling" if you do an "in kind" transfer - you are "taking income" so you do (potentially) pay taxes.

Shoot, you're right, i was thinking of the backdoor roth where you've already put after tax money in your tIRA. You're right, money out of a tIRA is taxable income.

BigBangWeary

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Re: So ... How do I actually take it out?
« Reply #11 on: August 31, 2016, 02:22:21 AM »
Thanks everyone for your feedback.

Nick_Miller it’s always nice to hear you aren’t alone on these things. Cheers.

Axecleaver, “Drawdown Strategies”, got it now. Thanks. Still a NOOB .

Our situation is slightly complicated by the fact that we are overseas and at arms-length in terms of Canada but believe at this stage that we will eventually return for retirement or some other phase of our lives.

I will definitely check out the suggested links.

Mrs. S

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Re: So ... How do I actually take it out?
« Reply #12 on: August 31, 2016, 04:15:34 AM »
The phrase you're looking for is "drawdown strategies." There's lots of them.

I like Nords's strategy of keeping two years of cash in three-year CDs. The first year you buy a two and a three year CD, and keep a year in cash. Every year after that, one of them matures. If the market is down over 10%, you let your investments recover. If the market isn't down, you withdraw another year of cash and buy a new three year CD with it, and cash in the oldest CD to cover spending.

Source: http://forum.mrmoneymustache.com/post-fire/what-has-workednot-worked-for-you-guys-who-have-been-fire-for-10-yrs/msg700740/#msg700740

This is what we plan on doing till we are 58 when we can tap into our social security (EPF) and then we will devise another strategy if required. We invest in growth funds which means we don't get any dividends instead our fund value keeps on going up. Till now in India any gains from equity and equity linked funds held for more than 1 year is tax free. So we will be selling a few units from our funds and hopefully not incur any tax.


Gadoc

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Re: So ... How do I actually take it out?
« Reply #13 on: August 31, 2016, 09:20:51 PM »
I recently read a book by Michael McClung, "Living Off Your Money", that does a good job of analyzing various withdrawal strategies during retirement.  You can download the first few chapters for free from his website.

http://livingoffyourmoney.com

In addition to analyzing existing withdrawal strategies the author proposes some new strategies that are outside the box when it comes to what is typically suggested by financial advisors.

BigBangWeary

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Re: So ... How do I actually take it out?
« Reply #14 on: September 01, 2016, 05:26:21 AM »
Thanks Gadoc, I will look into that.