CD ladder to cover ER to SS

[cazaubon]

I am thinking about setting up a CD ladder to get me from ER to social security (12 years).  I can't do Roth conversions because all my money is in a 401K and I need it next year, not 5 years from now, and the US/Canadian tax treaty does not cover Roths anyway (my money is in the US and I am retiring in Canada).  I have 8 years of expenses in a ladder right now, but that will only get me to 58.  Should I make a ladder for the following 4 years now (since the market is high) or just add CD rungs as I go along, to preserve possible return on stock portion?  72t SEPP plan will start withdrawals next year and I wanted to avoid sequence of returns risk by withdrawing only CD funds for the first part of my retirement.  Any thoughts?

[Jags4186]

I am thinking about setting up a CD ladder to get me from ER to social security (12 years).  I can't do Roth conversions because all my money is in a 401K and I need it next year, not 5 years from now, and the US/Canadian tax treaty does not cover Roths anyway (my money is in the US and I am retiring in Canada).  I have 8 years of expenses in a ladder right now, but that will only get me to 58.  Should I make a ladder for the following 4 years now (since the market is high) or just add CD rungs as I go along, to preserve possible return on stock portion?  72t SEPP plan will start withdrawals next year and I wanted to avoid sequence of returns risk by withdrawing only CD funds for the first part of my retirement.  Any thoughts?

We would need a more complete picture of your finances to give you any meaningful advice.

I would not recommend a CD ladder--even a jumbo 10 yr CD is only paying 3% these days.

[rpr]

I am thinking about setting up a CD ladder to get me from ER to social security (12 years).  I can't do Roth conversions because all my money is in a 401K and I need it next year, not 5 years from now, and the US/Canadian tax treaty does not cover Roths anyway (my money is in the US and I am retiring in Canada).  I have 8 years of expenses in a ladder right now, but that will only get me to 58.  Should I make a ladder for the following 4 years now (since the market is high) or just add CD rungs as I go along, to preserve possible return on stock portion?  72t SEPP plan will start withdrawals next year and I wanted to avoid sequence of returns risk by withdrawing only CD funds for the first part of my retirement.  Any thoughts?

Edit: the following information is likely incorrect. It was my bad that I did not read your post fully. I assumed you were a US resident.


Are you 50 years old right now and have eight years of expenses already set up in a CD ladder?

If so then the Roth conversion pipeline will be ideal for you. Start the Roth conversion pipeline before year 3 of your ladder and then you would have the money available to you in the eighth year when your current CD ladder ends. I would not do the SEPP 72t.

[cazaubon]

Yes, I will be 50 (when the withdrawals start next year) and have 8 years already set up in a ladder.  I was told by our corporate tax consulting firm that I should not open a TFSA or a Roth IRA because the tax treaty does not treat monies inside these accounts as non-taxable - any earnings received inside them would be immediately taxable.  The tax-free withdrawal status was not the issue, it was taxation of the money inside the Roth/TFSA during the holding period before withdrawal.  Is this not correct?

Also, the CDs are inside my 401K, so I need to set up the SEPP 72t just to get those out, and once set up the SEPP must run for 5 years or until I am 59.5 if I have understood the rules correctly.  The part about the early distribution from 401K is interesting to me - I am figuring with Canada federal and Quebec provincial income tax I am going to be paying about 30%, which is more that I will owe the US. So if I paid the 10% penalty to the US, I could apply that against the 30% tax I owe Canada anyway?

After looking at the CD rates vs an intermediate term treasury bond fund, I was thinking maybe that would be another option.  Thoughts?

[cazaubon]

Thank you for all that detailed information Cathy, I really appreciate it. I am a dual US/Canadian citizen residing in Quebec.  I do not have any Roth IRA or TFSA accounts since I was warned off them.  My husband does our taxes and is very competent (retired engineer).  I think we may want to do a taxcaster run before setting up the SEPP 72t to see how it would affect our US and Canadian returns.  If it does indeed prove to be a wash by paying the 10% extra to the IRS and end up paying less to CRA, then that is certainly the way I want to go to avoid the restrictions of the SEPP.  Many thanks!!