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Author: TheWizEd Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75340  
Subject: Balancing IRA vs. non-IRA Investments Date: 12/29/2013 10:51 AM
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I have just recently retired. I have an IRA and personal investment account. The IRA is significantly larger but both are substantial.

My question is which of the two should I draw from first?

The tax consequences of drawing from the IRA are greater because its all untaxed. Where as the tax on the personal account would only be on the profits.

Are there any other things I should considered in deciding on which to draw from at this early stage of my retirement?
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Author: joelxwil Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 74022 of 75340
Subject: Re: Balancing IRA vs. non-IRA Investments Date: 12/29/2013 11:01 AM
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Draw from the IRA last, so that you can get some tax-deferred profits from it before you draw from it.

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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 74023 of 75340
Subject: Re: Balancing IRA vs. non-IRA Investments Date: 12/29/2013 11:51 AM
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http://www.tiaa-crefinstitute.org/research/trends/tr100106.h...
Tax-Efficient Sequencing of Accounts to Tap in Retirement

http://www.vanguard.com/pdf/s557.pdf?2210022071
Spending From a Portfolio: Implications
of a Total-Return Approach Versus
an Income Approach for Taxable Investors

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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 74024 of 75340
Subject: Re: Balancing IRA vs. non-IRA Investments Date: 12/29/2013 12:56 PM
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Are there any other things I should considered in deciding on which to draw from at this early stage of my retirement?

How long will it be until you are required to make minimum withdrawals from your IRA? Will the minimum withdrawals be more than you need to withdraw, if you weren't forced to? Will those minimum withdrawals put you into a higher tax bracket? Do you want to do some conversions to a Roth IRA now to avoid future minimum required withdrawals that will be more than you need and may bump you up to a higher tax bracket?

AJ

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Author: TheWizEd Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 74025 of 75340
Subject: Re: Balancing IRA vs. non-IRA Investments Date: 12/29/2013 3:56 PM
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AJ,

Tough questions. I'm 63.5 which means required withdrawals are a ways off. So I really don't know how to answer your questions. I'm not familiar with a Roth IRA so I have to do some research about its advantages. And even if I can.

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Author: TheWizEd Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 74026 of 75340
Subject: Re: Balancing IRA vs. non-IRA Investments Date: 12/29/2013 3:57 PM
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Rayvt,

The Vanguard article was very helpful and relevant. Thanks.

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Author: GWPotter Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 74027 of 75340
Subject: Re: Balancing IRA vs. non-IRA Investments Date: 12/29/2013 8:55 PM
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Although many people will say there is only one answer, the optimal answer depends on your specific situation. Factors include age, size of IRA (which can get into RMD issues other have mentioned), spouse or other family members income/retirement, other income, etc.

Why not spend a couple of months looking at things, I assure you the spending for one vs the other account for a year from one account or the other is not going have a material effect on your wealth or income 20 year hence.

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Author: pauleckler Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 74028 of 75340
Subject: Re: Balancing IRA vs. non-IRA Investments Date: 12/29/2013 9:45 PM
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So I really don't know how to answer your questions.

To explain a bit, once you start taking Social Security and have mandatory IRA distributions (at age 70-1/2) you can be locked into a higher income tax bracket.

Pre-Social Security can be the lowest tax rate you are likely to see in retirement as you may be in situation to pay taxes only on what you spend.

If you find yourself in this situation, carefully consider your income tax rate and make sure you use all of the lower brackets productively.

If you don't need the income, then do partial Roth conversions on your IRA to pay minimal taxes now and avoid paying more later.

Roth advantage is you pay income taxes on the amount converted in that year, but pay no income taxes on distributions from the Roth later.

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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 74029 of 75340
Subject: Re: Balancing IRA vs. non-IRA Investments Date: 12/29/2013 10:15 PM
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pauleckler writes

Pre-Social Security can be the lowest tax rate you are likely to see in retirement as you may be in situation to pay taxes only on what you spend.

If you find yourself in this situation, carefully consider your income tax rate and make sure you use all of the lower brackets productively.

If you don't need the income, then do partial Roth conversions on your IRA to pay minimal taxes now and avoid paying more later.

</snip>


My current plan is to keep my income below 400% FPL for the next 7 years to maximize my Obamacare tax credit. Once I hit age 65, and switch to Medicare, I'll do Roth rollovers from age 65 to 70 to minimize RMDs at age 70 and beyond.

intercst

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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 74030 of 75340
Subject: Re: Balancing IRA vs. non-IRA Investments Date: 12/30/2013 10:08 AM
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Once I hit age 65, and switch to Medicare, I'll do Roth rollovers from age 65 to 70 to minimize RMDs at age 70 and beyond.

One problem is that if your regular IRA is a lot larger than your Roth -- which is likely if you roll a 401K into your IRA -- you just can't rollover very much until you hit the top of the 15% bracket. And then you not only pay 25% tax but your LTGCs and dividends get taxed, too.

I realize, of course, that this is akin to complaining that you've had to eat Prime Rib 5 times this week. ;-)

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Author: Hawkwin Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 74051 of 75340
Subject: Re: Balancing IRA vs. non-IRA Investments Date: 1/3/2014 11:01 AM
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One thing to consider (and not mentioned from what I can see) is that if you can keep your income in the 15% fed tax bracket and below, your qualified divs and LTC are tax free.

That means you may be better off taking out money from your IRA account unto that amount. If you find out that you go over, the IRS provides you with a provision to put some back before you file taxes to get below the 25% bracket.

And, if you are not getting an employer-provided healthcare benefit in retirement, I would also make sure I stay below the 400% FPL for the free ACA subsidy.

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Author: RetiredVermonter Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 74074 of 75340
Subject: Re: Balancing IRA vs. non-IRA Investments Date: 1/11/2014 10:03 AM
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We've been retired for several years. I have managed my own IRA for longer than that. We have also been on Social Security since age 62, also several years.

One aspect about an IRA that I love is that you can earn as much as you are lucky enough (or smart enough) to earn in there, and pay NO capital gains on any of it. After age 59-1/2, all you pay is normal taxes on what you withdraw. Pretty good deal - no?

In our case, since we do not make a lot on our SS income, even if I take several thousand a year from my IRA, I end up paying NO taxes on any of it.

In fact, I need to check this year's 1040, but I/we may end up not even having to file federal or state taxes at all this year! We'll see.

Vermonter

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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 74077 of 75340
Subject: Re: Balancing IRA vs. non-IRA Investments Date: 1/11/2014 2:36 PM
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One aspect about an IRA that I love is that you can earn as much as you are lucky enough (or smart enough) to earn in there, and pay NO capital gains on any of it. After age 59-1/2, all you pay is normal taxes on what you withdraw. Pretty good deal - no?

Actually, no.

Converting capital gains into ordinary income is generally not a good idea. Capital gains get taxed at preferential tax rates.

The benefit from an IRA is the deferral of taxation from your high earnings years - which are typically your higher tax rate years - to lower earnings, and lower tax rate, years.

And that appears to be the benefit you are enjoying. You put money into your IRAs when you were working, and now in retirement you are withdrawing that IRA money with little or no taxes. Well done!

--Peter

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Author: billjam Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 74078 of 75340
Subject: Re: Balancing IRA vs. non-IRA Investments Date: 1/11/2014 5:13 PM
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I think the real benefit of the IRA is allowing dividends and capital gains to compound tax-free all those years, at least for me. I'm not a day trader but I traded within my IRA without worrying about short term or long term. I had mutual fund dividends and capital gains I could reinvest without paying tax. I have a taxable brokerage account too but it never grew as fast as the IRA because I had to keep paying taxes on the income and cap gains. Compounding is a great thing. Compounding without annual taxes is a fabulous thing.

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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 74079 of 75340
Subject: Re: Balancing IRA vs. non-IRA Investments Date: 1/11/2014 9:44 PM
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billjam writes,

I think the real benefit of the IRA is allowing dividends and capital gains to compound tax-free all those years, at least for me. I'm not a day trader but I traded within my IRA without worrying about short term or long term. I had mutual fund dividends and capital gains I could reinvest without paying tax. I have a taxable brokerage account too but it never grew as fast as the IRA because I had to keep paying taxes on the income and cap gains. Compounding is a great thing. Compounding without annual taxes is a fabulous thing.

</snip>


Don't forget that you'll pay ordinary income tax rates on withdrawals from a traditional IRA. While a tax-efficient investment in a taxable account like Berkshire Hathaway would be taxed as capital gains. (0% tax on first $36,250 in gains for singles, $72,500 for a married couple).

intercst

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Author: inparadise Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 74312 of 75340
Subject: Re: Balancing IRA vs. non-IRA Investments Date: 2/28/2014 11:33 AM
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The benefit from an IRA is the deferral of taxation from your high earnings years - which are typically your higher tax rate years - to lower earnings, and lower tax rate, years.

Sorry, a bit late to this thread. Just found this board and bookmarked it.

This topic has huge interest for us right now as we plan our strategy for draw down of assets in stage 1 of retirement.

Retiring in 18 months or so, DH 56 and me 52. Have significant amount of assets in taxable accounts, some of which will incur large cap gains upon sale, a decent sized 401K (with Vanguard as administrator) enough to fund 3-4 years of retirement expenses that can be tapped penalty free by DH, and significant amounts in IRAs with 90% traditional, 10% Roth.

We figure that our lowest tax years will be from 57 to when we take SS. Struggling with is it better to draw on 401K at our low tax rate, keeping our taxable accounts fully funded? It helps to realize we also will be paying about $200,000 in kids' college costs from DH age 56-61, so keeping assets on hand is not a bad thing. I have no idea if our much reduced income will have much of an effect on our expected family contribution for financial aid. Not looking for loans, and expecting to have to pay full amt. Have retiree health insurance, but only for us. Would have to go ACA to get kids covered, looking to keep income to point where we benefit from subsidy, with ironically the costs for the 4 of us under ACA being less than the retiree health care for the two of us.

I guess the argument in favor of spending taxed accounts and keeping funds in 401K would be ability to convert to Roth down the road. Are there 70.5 age RMDs on a 401K if our plan lets us keep the funds in there, or is that only if we roll it over to a Trad. IRA? Besides minimizing RMDs and their impact on taxing SS, would like to max out Roth conversions in the event that we don't use all our funds before we die. Because we are not looking for a high expense retirement, frankly initially doing quite well with $50K expenses (taking college costs from saved funds), our FP expects we will leave a significant amount to the kids. Yeah, we might spend more when we get a better handle on what costs really are, as opposed to the educated guesses we are making now, but neither of us are spenders.

Any large gaping holes in this thought process? For decades we've simply maxed out savings in the most tax advantaged way that we could with a good return on investment. Trying to get into spending mode with a focus on maintaining max tax advantage/return and now focusing more on risk.

IP

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