Author Topic: Withdraw from Taxable, Traditional ret, Roth ret decisions  (Read 1527 times)

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I've been trying to save in the "right" account types throughout without having a real retirement plan (date, etc) or even knowing much about my future annual income due my income fluctuating greatly year to year. Now that I think I'm approaching FIRE, I need to start figuring some things out.  For years I had no 401k option so would save in IRA/spousal IRA and taxable.  In years I was below the 25% bracket I would use a Roth, in years in and above that bracket I would save in tax deferred and take the deduction.  Finally when I started a business I was able to plow a lot into a Solo 401k, so did so given my taxable accts was much larger than my retirement accts.

So I think I'll hit retirement with around this account mix (pretty much a 80/20 portfolio overall):

800k taxable
400k tax deferred
400k post tax
Paid off House

If I retire in a few years at the age of 48 planning to take between 4-5% annual withdraws:

1) is it just obvious I will leave my retirement accounts alone and take my withdraws to live off of from the taxable accounts until I'm 59? or are there smarter decisions to be made even at that point?, and
2) I've been looking at my investment allocations in an overall way and haven't looked much into whats in which accounts.  Do I need to focus on things like getting the retirement portfolios more equity heaver and moving toward having all my less risk/lower return assets into the taxable?  I would guess any changes I would make in my taxable account to best balance I would probably save for after I FIRE so any taxable gains triggered from the moves would not cause much or any of a tax due to my much lower income bracket at that point compared to while working.  Guess I'm just looking for a starting point/idea on how to best handle


« Last Edit: March 10, 2017, 06:28:56 AM by Strick »


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Re: Withdraw from Taxable, Traditional ret, Roth ret decisions
« Reply #1 on: March 10, 2017, 07:36:58 AM »
Yes you would take the money out of taxable, you're paying taxes or at least declaring income on the dividends you're getting from those accounts anyway.


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Re: Withdraw from Taxable, Traditional ret, Roth ret decisions
« Reply #2 on: March 10, 2017, 08:00:39 AM »
It's not as obvious as you'd think to just withdraw from your taxable until the calendar year you're 59.5, and then start withdrawing from your retirement accounts. The reason is Required Mininum Distributions (RMDs). When you hit 70.5, you're going to be forced to withdraw increasing percentages of your money in tIRAs every year. The RMDs that come from your traditional accounts will be taxed. Now remember, if you avoid withdrawals from your tIRAs until 59.5, that's 11.5 years of unhindered growth your tIRAs will experience. It is possible that you may end up with a large enough balance in your tIRAs that it will force you to withdraw more money than you wish to spend in a year, resulting in higher taxes paid than you'd have otherwise paid.

Hence, it can make sense to execute the Roth conversion pipeline, while skipping step 5. But you should only convert a small amount each year.

I don't know which state you live in. If you live in a state without income tax, then the amount you should convert each year is the total of standard (or itemize, if you itemized) deduction + exemption. Then withdraw only shares from your taxable account that only have long term capital gains. This way you can pay nothing in taxes, while still selling shares in your taxable account to live off of and converting money from your tIRAs to Roth IRAs to avoid future RMDs.
Go Curry Cracker has a more in depth explanation of what I'm talking about.

Furthermore, if you do live in a income tax free state, you should also do capital gain harvesting, which Go Curry Cracker mentions as well in that post.

If you do not live in an income tax free state, then whether you should do these tIRA to Roth IRA conversions is less clear. You'd have to do the math on the state taxes you'd pay for the conversions and compare that to your projected RMDs when you hit 70.5. The equations shouldn't be complicated, but the issue is you have to put in a guess of investment returns in your tIRA, since the taxes paid because of RMDs is going to depend on your future tIRA balance.


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Re: Withdraw from Taxable, Traditional ret, Roth ret decisions
« Reply #3 on: March 10, 2017, 10:00:30 AM »
Lots of great info in Johnny's post. I would just add that your cost basis on that 800K in taxable is something to consider. In other words, if your cost basis is high, you might treat those funds a bit differently than if it is much lower due to tax implications. Of course AA within each account should be a consideration but much of the advice here so far is focusing on paying as little tax as possible in retirement.

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Re: Withdraw from Taxable, Traditional ret, Roth ret decisions
« Reply #4 on: March 10, 2017, 03:43:52 PM »
Thanks Johnny, that's all very helpful.  I guess I'm in an in between State re: state taxes being in PA (taxable gains would incur state income tax, but a Roth conversion would not, as PA never allows the Traditional deduction in the first place and so basically treats all retirement accounts as Roths).  I did do some capital gains harvesting years ago when I had some down years that made them free, had forgotten all about how advantageous that was.