Over at Bogleheads we came across the following discussion:
tax efficient withdrawals in retirement
by SGM » Sun Jul 13, 2014 9:51 pm
I had been thinking taxable, then traditional then Roth withdrawals in retirement. Probably not taking Roth withdrawals until my 80s or 90s or not at all. I had pretty much been thinking of marginal tax rates, but that leaves out some potential tax free withdrawals from traditional IRAs. I will be in a high tax bracket in retirement.
Some IRA funds can be removed at the zero tax rate. If you have a lot of income that is fully taxable it doesn't work out.
Standard deduction for over 65 is 7,750 and personal exemption is 3,750. Withdraw 11,750 at the zero rate.
Then withdraw from traditional IRA up to the top of the 15% bracket. Some of that is taxed at 10%.
It seems to me this would allow a portfolio to last longer than taking all from taxable and when that is depleted take all withdrawals up to 15% tax rate from traditional IRAs until depleted and the balance of spending money from Roths. When the traditional IRA is completed all withdrawals are from Roths.
It also seems that this would be true if most of the income is from long term capital gains and qualified dividends or muni bonds. Unqualified dividends and other fully taxed income in larger amounts would make this approach less advantageous or not advantageous at all as they would fill up the zero, 10% and 15% brackets. For higher incomes the withdrawals would be advantageous unless the withdrawals put you in a higher bracket, kick in extra Medicare costs, or put you into the alternative minimum tax range or if you have already filled those lower levels with fully taxable income.
I am wondering if this makes sense to others, and if anyone has looked at a spreadsheet for calculating this. I don't really want to plug these numbers into a tax program as I am looking at differences over 30 to 35 years out and there are multiple scenarios that would be more easily handled by a spreadsheet.
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Re: tax efficient withdrawals in retirement
by Watty » Sun Jul 13, 2014 10:05 pm
If you have not already seen it, then take a look at this wiki
For people in high tax brackets there are tax effecient mutual funds and muni bond funds that will help control the taxes.
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Re: tax efficient withdrawals in retirement
by livesoft » Sun Jul 13, 2014 10:10 pm
You are thinking correctly that withdrawing simultaneously rather than sequentially from multiple types of accounts may give you the lowest overall tax cost. Perhaps not so obvious is that sometimes withdrawing a portion from a Roth earlier rather than saving those withdrawals until the end can also reduce taxes.
Some discussion on all this was in this ZERO taxes thread: viewtopic.php?t=87471 where an example of using the Optimal Retirement withdrawal calculator ( http://www.i-orp.com new features added in past 2 weeks! ) was shown along with some turbotax discussion.
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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Re: tax efficient withdrawals in retirement
by DSInvestor » Sun Jul 13, 2014 10:13 pm
If you have assets in taxable and are not receiving social security or pension income to leave your 0% tax bracket wide open, you may want to consider Roth conversion to consume the 0% tax bracket rather than withdrawal from your Traditional accounts. Any QDI and LTCG thrown off by the assets in taxable will be taxed at 0% up to the top of the 15% bracket. State taxes may apply though.
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Re: tax efficient withdrawals in retirement
by sscritic » Sun Jul 13, 2014 10:16 pm
SGM wrote:I will be in a high tax bracket in retirement.
I don't think of 15% as high.
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