Tax efficient retirement account withdrawals
by ralph124cf » Tue Apr 01,
2014 6:37 pm
I am trying to determine the best way to mix withdrawals from 401(k), Roth and after tax savings in retirement.
My wife and I have just turned 65, and are now fully retired. We have about 3M in IRA/401(k) invested in individual stocks, ETFs and REITS with some gold mine mutual funds. We have 1M in Roth money similarly invested, and about 1M in rental properties with a positive cash flow but a loss for tax purposes. We also have 500K in taxable brokerage accounts and money markets. We own no bonds or fixed income funds.
I expect no further wage income, ever. My current plan is to file and suspend for Social Security benefits when I turn 66, and then the following month when my wife turns 66, she will file for spousal benefits of $14,000/year. The following year, I will file for a PBGC benefit from a former bankrupt employer that will pay $40,000 per year, with joint and 100% survivor benefits. When my wife and I turn 70, we will each qualify for Social Security of $40,000 per year. With a total fixed income of $120,000, I see no reason for fixed income investments at todays interest rates.
One financial adviser has told me that I should first deplete my after tax savings, and then my Roth, before touching my pretax accounts, because this way I would not have to pay any taxes for the first five years or so of retirement.
I think that he is wrong, and that I should take enough from my pretax accounts to fill up either the 25%($148k taxable income) or 28%($226k taxable) bracket. Two other income break points to consider are the Medicare high income penalty premiums that kick in at $170k MAGI ($950/year for a couple) and 214k MAGI ($2500/year). My state does not tax retirement account withdrawals, pensions, or Social Security.
I have been trying to figure out how to minimize the present value of my future tax payments. I have been trying to find an algorithm that would let me figure in higher future tax rates, but have not been able to find one online.
Ideas?
Ralph
Posts: 6
Joined: 1 Apr 2014
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01,
2014 7:46 pm
You will need to work to figure this out. I don't think anyone is going to do it for you.
The tools to use are described a little bit in this thread: viewtopic.php?t=87471 and they are the tool at www.i-orp.com and TurboTax. You will use i-orp to get a ballpark idea of what to do and then use TurboTax to confirm the idea over many items by creating several "What if?" tax returns over a range of years.
In some sense, you have too much money, so you will have to pay taxes. Nothing wrong with that.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Joined: 1 Mar 2007
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Re: Tax efficient retirement account withdrawals
by JW Nearly Retired »
Tue Apr 01, 2014 8:24 pm
ralph124cf wrote:One financial adviser has told me that I should first deplete my after tax savings, and then my Roth, before touching my pretax accounts, because this way I would not have to pay any taxes for the first five years or so of retirement.
I don't understand the not paying any taxes the first 5 years. Won't the PBGC pension be taxable income? And some percentage of the SS because you have that income? Also cap gains income you realize from selling taxable account equities?
Anyway, the trouble with the low or no taxes for the first 5 years is then it jumps to a 33% marginal rate. Your IRA/401k could easily grow to $4M in 5 years, and the first RMD on that would be about $150k. That plus your $(40+0.85x80) = $108k other income is an AGI of $258k. I think it would make more sense now, before you get to max SS payments, to take some of the IRA/401k money and do some Roth converting up to the top of the 25% (or even 28%) bracket. The more money you get out of the tIRA and into a Roth, the less RMD you have to take.
The other issue is what do you want to do with your money? Are there heirs or charitable causes you wish to leave money to? A Roth is much more valuable to heirs than a tIRA.
There is a really good Roth Conversion Decision Model Spreadsheet (by our own BigFoot48) that was very useful to me in deciding how to do this. You can download it here: viewtopic.php?f=1&t=97352
JW
Retired Summer 2013
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Joined: 16 Dec 2007
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Re: Tax efficient retirement account withdrawals
by ralph124cf » Tue Apr
01, 2014 9:57 pm
Hi JW.
You are right that the PBGC would be taxable, but after Real Estate taxes, I would be well inside the 15% bracket. Also I have about 130K of suspended rental property losses that I have not been able to take due to income above 150K.
There are no heirs that I care about leaving money to. There are some default charities in our will, but nothing particularly important.
Ralph.
Posts: 6
Joined: 1 Apr 2014
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Re: Tax efficient retirement account withdrawals
by ralph124cf » Wed
Apr 02, 2014 12:17 am
livesoft wrote:You will need to work to figure this out. I don't think anyone is going to do it for you.
The tools to use are described a little bit in this thread: viewtopic.php?t=87471 and they are the tool at http://www.i-orp.com and TurboTax. You will use i-orp to get a ballpark idea of what to do and then use TurboTax to confirm the idea over many items by creating several "What if?" tax returns over a range of years.
In some sense, you have too much money, so you will have to pay taxes. Nothing wrong with that.
Hi Livesoft.
Thanks for the links. I-orp is especially useful. It seems to be telling me to convert about 200K from Traditional to Roth for the next five years. It seems to want me to go to the max of the 28% bracket. I can't quite figure out how to make the program recognize the adjustment to the social security benefit when my wife switches from 50% of my age 66 benefit to 100% of her benefit at age 70.
Interestingly, the program is telling me that we can spend, after taxes, twice our average before tax earnings over the last ten years until I die at 80, (my estimate) and then at 150% until my wife's death at 105, inflation adjusted. I realize that this is highly dependent on assumptions, but I left in the default 7% earnings assumption, and increased the programs inflation assumption to 3.5%. I also upped the tax rate assumption to 33%. This seems like a higher spending rate than other calculators that I have tried.
Right now I think that I will transfer enough from traditional to Roth to bring me almost to the 214K MAGI Medicare penalty breakpoint.
Thanks,
Ralph
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Joined: 1 Apr 2014
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Re: Tax efficient retirement account withdrawals
by scifilover » Wed Apr
02, 2014 8:40 am
The Medicare surcharge is not material for a person in your situation. You would pay an extra premium of $31 a person per month if you go over $214k. If you project reasonable gains in your tax advantaged accounts between now and the time you turn 70.5, and then look at what your RMD will be at that point, you will understand. I have been working on a similar problem with my IRA. I have managed to move 30% to my Roth. However, I have more in the IRA than when I started, thanks to growth.
Also, you need to spend more money. 
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Re: Tax efficient retirement account withdrawals
by JW Nearly Retired »
Wed Apr 02, 2014 11:50 am
scifilover wrote:The Medicare surcharge is not material for a person in your situation. You would pay an extra premium of $31 a person per month if you go over $214k.
$31 is just for medicare D (drug plan). The medicare B + D penalty from crossing $214k AGI is $82/person/month. That's nearly $2000/year for a couple.
JW
Retired Summer 2013
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