RE Dristribution Plan - Please Confirm

[Threshkin]

Please validate/correct our post retirement investment bucket distribution plan.

As we enter into the RE stage of our FIRE plan we need to decide which funding sources to withdraw living expenses from.  Here is our current plan:

• Cash accounts
• Taxable investment accounts
• Traditional IRA
• Roth IRA

This is the order I plan to withdraw money from, moving to the next type of account when the current account is empty.

This plan is for net retirement expenses, after side gig, SS, or RMD income.  We expect to be receiving SS and RMD before the taxable accounts are depleted.  We will gradually transfer funds from our T-IRAs to R-IRAs.  The cash accounts are small or they would be rolled into the taxable investments.  Side gig income will first and foremost be used to fund T-IRA or SEP accounts to minimize the tax burden.  Any excess income from SS and RMD would go into taxable investments.

Simple plan, I know. (But I like simple) Is it the right sequence?

[Cheddar Stacker]

It sounds reasonable for the most part. If using #2 or #3 creates too much taxable income in any given year, consider supplementing with #4 since there is (currently) no tax on Roth withdrawals. Other than that I wouldn't change anything.

[Threshkin]

It sounds reasonable for the most part. If using #2 or #3 creates too much taxable income in any given year, consider supplementing with #4 since there is (currently) no tax on Roth withdrawals. Other than that I wouldn't change anything.

Thanks Cheddar.  I was considering taxable income and withdrawals for expenses separately.  Income generated from #2 is taxable even if we don't spend it, withdrawals in and of themselves should not be taxable.  That is one reason we want to spend down #2 as early as possible.  We intend to minimize the tax implications of distributions from the T-IRAs by transferring funds to R-IRAs as much as possible.  But we will definitely consider leveraging the R-IRAs to reduce the tax burden.

The bulk of our assets are currently in T-IRAs (~50%).  If we do not transfer funds the SS and RMD income will exceed our expenses for many years.  As I understand it, we cannot use this excess to fund any tax advantaged accounts, that our only investment option is to fund taxable accounts - Correct?

[Cheddar Stacker]

Taxable income and expenses are a very important distinction and I'm glad you are aware of the difference, but it doesn't change my answer in any way. It sounds like you have a solid plan.

Distributions from TIRA and rollovers from TIRA to RIRA will be taxed the same way. You likely know this already, but the way you worded something there compelled me to write it just to be sure.

I would get the TIRA money over to RIRA as soon and as often as you can. Completely fill up the 15% tax bracket in order to do so. You still shouldn't be taxed on your taxable investment account income in that bracket if it's positioned in qualified long-term investments (no REIT's/Bonds/Foreign).

I'm 99% certain you need earned income to fund a tax advantaged account. After FIRE the only avenue for this would be the side gig income you mentioned.

A few side benefits to your strategy you may or may not have thought about:
1) Spending the cash and taxable investments first reduces your exposure to liability from lawsuit, medical catastrophy, bankruptcy, etc. since they are not as protected as retirement accounts.
2) Roth IRA's do not have RMD's.
3) SS income will not be taxable if your other income is low (under $20K I believe) so it's best to deplete the taxable investments and TIRA's before collecting SS.

Are you currently entering ER or is this speculation for the future?

[Threshkin]

Are you currently entering ER or is this speculation for the future?

Thanks again Cheddar.  I will aggressively transfer funds from TIRA to RIRA once I RE.  It has not been a viable option before because of the tax implications.  I was good about maxing out my 401k's since they were first offered so the TIRA/T401k balance is pretty high.  The "E" portion of RE is not very high though so I do not have a big time window to move funds.

We are on the verge of RE and are trying to get organized.  Actually it will initially be FMLA and PLA to care for aging parents overseas but the net effect is the same since I suspect the care taking period may be extended. 

[Cheddar Stacker]

Cool. Good luck, and I hope the oversees trip will allow you to have some fun in addition to enjoying your family before their departure.