Author Topic: Taking big lump sum from retirement savings  (Read 4343 times)

OzzieandHarriet

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Taking big lump sum from retirement savings
« on: January 11, 2020, 05:21:38 PM »
Anyone who has done this post-FIRE, how did it work out with taxes, normal withdrawals for living expenses, other stuff? Is there a good calculator somewhere that I could play with?

Iím talking $300k or so.

Better to withdraw in stages over a few years?

BECABECA

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Re: Taking big lump sum from retirement savings
« Reply #1 on: January 11, 2020, 05:29:55 PM »
I havenít done it yet, but when I take out a big lump sum to payoff the remainder of my mortgage when my spouse retires. I like this website for visualizing how itíll be taxed:
https://engaging-data.com/tax-brackets/

But for regular living expenses, I plan to dollar cost average and take out only what I need each month, and keep my income low to qualify for ACA discounts.
« Last Edit: January 11, 2020, 05:31:41 PM by BECABECA »

OzzieandHarriet

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Re: Taking big lump sum from retirement savings
« Reply #2 on: January 11, 2020, 05:35:48 PM »
I havenít done it yet, but when I take out a big lump sum to payoff the remainder of my mortgage when my spouse retires. I like this website for visualizing how itíll be taxed:
https://engaging-data.com/tax-brackets/

But for regular living expenses, I plan to dollar cost average and take out only what I need each month, and keep my income low to qualify for ACA discounts.

Thatís helpful, thanks!

We donít need to keep income low for any particular reason other than not paying more in taxes than necessary.

secondcor521

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Re: Taking big lump sum from retirement savings
« Reply #3 on: January 11, 2020, 09:18:51 PM »
Anyone who has done this post-FIRE, how did it work out with taxes, normal withdrawals for living expenses, other stuff? Is there a good calculator somewhere that I could play with?

Iím talking $300k or so.

Better to withdraw in stages over a few years?

Generally speaking, it's better to spread it out over a few years, especially with that amount of money.  Not only are our tax brackets progressive, there are a lot of tax credits and deductions that phase out at various income levels (ACA tax credits, education credits and deductions, EITC, retirement savings credits).

As a rough first approximation, if you need the money in N years, take out $300K / N evenly between now and then.  There are more complexities that could be considered, but that's a decent first guess.

What's it for, if you're OK sharing?  It might be possible and even reasonable to set up a payment plan for something that expensive.  It'll cost you in loan fees and interest, but might be cheaper than getting hit with high taxes for the next N years.
« Last Edit: January 11, 2020, 09:20:44 PM by secondcor521 »

John Galt incarnate!

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Re: Taking big lump sum from retirement savings
« Reply #4 on: January 13, 2020, 03:08:51 PM »
Anyone who has done this post-FIRE, how did it work out with taxes, normal withdrawals for living expenses, other stuff? Is there a good calculator somewhere that I could play with?

Iím talking $300k or so.

Better to withdraw in stages over a few years?


Yes, that's what I would do.

Why?

Since the stock market goes up more often than down by withdrawing in stages the odds are that the $ not withdrawn will grow.

And by withdrawing smaller amounts in stages, depending on your total financial position,   you may have more  options to minimize taxes .

Good luck!

Greystache

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Re: Taking big lump sum from retirement savings
« Reply #5 on: January 16, 2020, 08:29:39 AM »
I planned for big, infrequent expenses in retirement by putting a pile of money into Roth IRAs and a municipal bond fund before I retired.  When I need to replace a furnace or car I tap those funds with little or no tax consequences. I also tried to knock off some big expenses before I retired (paid off mortgage, got a new roof, etc).

sherr

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Re: Taking big lump sum from retirement savings
« Reply #6 on: January 17, 2020, 07:43:43 AM »
Since the stock market goes up more often than down by withdrawing in stages the odds are that the $ not withdrawn will grow.

I'm not sure this part makes sense. The options are probably between "take the $300k lump sum out in 2025 (or something)" and "take $60k out each year for the next 5 years". I don't know why someone would take the lump sum out this year if the option of spreading it amongst multiple years is still on the table.

BTDretire

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Re: Taking big lump sum from retirement savings
« Reply #7 on: January 18, 2020, 09:16:10 AM »
I took out what was a big lump sum for me. I took $126k out of a regular non-tax advantaged account, that was 58% LTCGs. This should allow me to pay 0% taxes as I'm under the $78,750.
 That lump sum should cover our living expenses and a high tuition for one of my kids.

 If you have LTCGs, you might try selling what you can to reset the cost basis while staying in a low tax bracket.

jeroly

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Re: Taking big lump sum from retirement savings
« Reply #8 on: January 18, 2020, 09:21:48 AM »
I havenít done it yet, but when I take out a big lump sum to payoff the remainder of my mortgage when my spouse retires. I like this website for visualizing how itíll be taxed:
https://engaging-data.com/tax-brackets/

But for regular living expenses, I plan to dollar cost average and take out only what I need each month, and keep my income low to qualify for ACA discounts.

Thatís helpful, thanks!

We donít need to keep income low for any particular reason other than not paying more in taxes than necessary.
Well, thatís a pretty good reason!

In addition to taking the taxes paid on that $300k youíll have to pay taxes on the dividends and capital gains distributions earned on that money in your taxable accounts, whereas you get the tax-free buildup while it sits in your IRAs or 401(k)s...

OzzieandHarriet

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Re: Taking big lump sum from retirement savings
« Reply #9 on: January 19, 2020, 10:42:17 AM »
Thanks for the comments. I asked about this because DH and I keep idly wondering whether it would be crazy or prohibitively costly - if something great came up - to take a larger chunk of money out of the tax-sheltered accounts to pay for it. If this were to buy real estate, it would not make sense to take out a loan - with costs and interest would likely come out the same or more as paying extra taxes, and without full-time jobs would be harder to get a loan anyway. For any expense smaller than that (that I can think of), we have penalty-free accounts available. For example, we just had to replace the furnace and AC and buy a new stove (gas leak problems), and it's not even a blip. We are getting to the point where we will have more money in the retirement accounts than we probably will spend in the normal course of things over the next 20-30 years (max expected lifetime - I'm 62, DH is 60). We have no debt - a paid-off house - reasonable expenses. No kids. There are some younger relatives (nieces and nephews), but they are all adults, and we are not particularly close to them. We can always leave any money we have left to charity, I guess. But who knows what the world will be like over the next few decades?

Miss Prim

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Re: Taking big lump sum from retirement savings
« Reply #10 on: January 20, 2020, 05:13:48 PM »
If you may buy real estate is if for yourself or as a rental property?  I ask this because it would be probably be better to take a mortgage out so you will have deductions against income.  We bought a 2nd home after we retired and we got a mortgage with no problems.  We had excellent credits scores (800's) and we had to bring in all our statements to prove that we had money to pay a mortgage.  The amount of mortgage interest we pay is peanuts compared to what we have made with leaving our money in stocks and bonds.  We do pay extra every month on the mortgage but just because my husbands hates owing money, so I do it to placate him! 

If it was me, I would not withdraw that much money in one year.  I would spread it out over a few years as others have said.

                                                                        Miss Prim

LateToTheParty

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Re: Taking big lump sum from retirement savings
« Reply #11 on: February 06, 2020, 06:03:14 AM »
Since it seems like this is hypothetical situation, how about doing some strategic planning. Roll over some of money every year into a Roth. Keep doing the amount that youíre comfortable with paying the taxes on.   Tax rates are lower now than they likely will be in future, and staging it over a decade(s) allows you to stay in lowest tax brackets.
This will minimize future tax burden from RMDs when combined with SS in future. And gives you the future wiggle room for those unexpected big expenses in one year.

Car Jack

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Re: Taking big lump sum from retirement savings
« Reply #12 on: February 06, 2020, 07:26:19 AM »
This is a perfect example of an "it depends" answer.

How much income do you have?
Where is the money coming from?
If money is from taxable, what's the cap gains?  Long or short term?
All other things equal, maybe consider pulling money that will someday become RMDs.

If you're pulling from a 401k/tIRA account, it's pretty easy to figure out the tax bracket you'll pay taxes in.  Obviously, pulling out $300k, you're going to be feeling like you're in the prison shower.  Instead, taking $60k for 5 years, it'll be more of awkward stares in the prison yard, but for every year.

Taking from taxable, if you have some investments that don't have big gains, they're not going to generate a lot of cap gains and taxes. 

Heck....if you have savings bonds, there's no state income tax and fed tax will be only on the interest.  (I have a lot of savings bonds).

BlueHouse

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Re: Taking big lump sum from retirement savings
« Reply #13 on: February 06, 2020, 08:06:57 AM »
I just did this for my mom when we moved her into a retirement community.  I started a thread and got good advice that helped me create a spreadsheet to run different scenarios based on my mom's SS and pension income and taking distribution in one year vs. 2, vs. 3 years.
 
We ended up splitting into 2 years (one distro in Dec, one in Jan) and at the last minute, decided to hold $10K in the account to save another $2K in taxes. 

Setting up a spreadsheet with your data in it really helps. 
We ended up saving over $3500 by spreading over two years.  She'll eventually pay tax on the other $10K, but she'll be out of the 20% bracket and back near 10% or 12% by then -so another $2K savings. 



OzzieandHarriet

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Re: Taking big lump sum from retirement savings
« Reply #14 on: February 06, 2020, 11:57:33 AM »
The potential RMDs when we turn 70, especially projecting what the accounts could be worth by then, are kind of scaring me. So yes, I'd like to roll some of our tax-advantaged retirement savings over to Roths every year for sure. Our house is paid off, and we've thought off and on about buying another place for our own enjoyment (I mean, why not if the money is no object?), which is why I started wondering how it could be managed.

2019 was the first year we were both completely retired (at least from full-time employment - we did earn a little bit) and started drawing expense money from retirement accounts, so we'll see how it plays out in our taxes for the year.

We aren't using the ACA exchanges because we have insurance through DH's former employer (we are paying for it, but it's partially subsidized and is top of the line coverage).

secondcor521

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Re: Taking big lump sum from retirement savings
« Reply #15 on: February 06, 2020, 01:08:47 PM »
The potential RMDs when we turn 70, especially projecting what the accounts could be worth by then...

If you're running a spreadsheet, you might want to update your RMD starting age to 72.  The law changed in December with the passage of the SECURE Act.

By the River

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Re: Taking big lump sum from retirement savings
« Reply #16 on: February 07, 2020, 02:28:11 PM »
We aren't using the ACA exchanges because we have insurance through DH's former employer (we are paying for it, but it's partially subsidized and is top of the line coverage).

Not sure about your insurance after age 65, but Medicare's part B and D premiums are based on earnings from previous-previous year.  (2020 rates based on 2018 income).  Noticed that your husband is 62, so if you plan on taking Medicare at 65, factor the increase in costs as well as taxes for taking all this year versus next.  I think I will have this situation in a few years as well