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In what order should someone withdraw from their retirement savings, assuming that they have a regular IRA, Roth IRA, regular savings, and an annuity that is still in accumulation phase?

Thanks,
Zev
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Assuming you are over 59-1/2 and have free access to the IRA's and that returns on investment are the same, I should think you would want to withdraw from regular savings first (as this reduces your income tax), but the choice between regular and Roth IRA is a pay-me now or pay me later thing. It would depend on your tax rates and advantages to your heirs. Roth gives you more assets longer, and because its tax free, smaller withdrawals are needed for a given net, but you potentially stick your beneficiaries with a large tax bill.
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<<In what order should someone withdraw from their retirement savings, assuming that they have a regular IRA, Roth IRA, regular savings, and an annuity that is still in accumulation phase?>>

Don't know about annuity, don't have one, won't have one. Of the remaining three, I'd take from regular savings first if you haven't reached the age for "have to" start withdrawing from regular IRA. This allows the regular IRA to grow a little more tax deferred where your regular savings is being taxed anyway. I'd withdraw from the Roth last because of the "tax free" status and ability to pass it on to others and keep the "tax free" status for them.

JLC
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The issue of when and how much to draw from tax-deferred is an interesting one. I believe that TMFPixie addressed it sometime back in a post. However, he sorta left me hanging with the answer. Is it better to draw earlier that age 71.5 or wait?

I have done a rather crude look with a spreadsheet using as a criterium for comparison the accumulated Net Present Value after-tax assuming all after-tax funds are invested and 89% of the returns will be capital gains taxed at 20% (8% CG, 1.1% div yield). I assumed that all withdrawals starting at either age 60 or age 71 are term-certain and that the tax rate at age 71 is 39.6% . The early withdrawal scheme only wins if the ordinary tax rate is 28% on all withdrawals under this scheme and, of course, 39.6% for the delayed scheme. However, assuming a 31% rate for the early scheme produces a NPV that is 98.8% of that for the deferred scheme.

Of course, there are some other advantages to having funds free of the tax burden early in ones life.

Comments?

FoolishProf
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FoolishProf sez:

<<The issue of when and how much to draw from tax-deferred is an interesting one. I believe that TMFPixie addressed it sometime back in a post. However, he sorta left me hanging with the answer. Is it better to draw earlier that age 71.5 or wait?>>

All things being equal (and they never are), with the scenarios I've been playing with (about 1/3 in taxable accounts, 2/3 in traditional IRA), under the current tax structure a LRB&H investor is better off taking from the traditional IRA first, next the taxable. That lessens the total tax burden to the investor while living and the heirs after death. However, much depends on rates of return in the taxable and tax deferred accounts, the length of withdrawal period, the rate of withdrawal, inflationary increases in withdrawals, and income tax rates.

IMHO we must establish the assumptions appropriate to our circumstances and run the numbers under those assumptions for a comparative analysis. There just ain't a general rule of thumb because everyone's situation is different.

Regards..Pixy
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From TMFPixy:

IMHO we must establish the assumptions appropriate to our circumstances and run the numbers
under those assumptions for a comparative analysis. There just ain't a general rule of thumb
because everyone's situation is different.

Regards..Pixy


As is the case with plenty of complex issues, there is not a simple solution. The usual "it depends" applys. Does anyone know of some free or cheep software that addresses this? All of the financial planning software I have found just automatically wait until "haf tu" at age 71.5 to start the draw from tax-deferred acounts unless necessary to meet a need.

FoolishProf
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bailey7094 asks,

As is the case with plenty of complex issues, there is not a simple solution. The usual "it depends" applys. Does anyone know of some free or cheep software that addresses this? All of the financial planning software I have found just automatically wait until "haf tu" at age 71.5 to start the draw from tax-deferred acounts unless necessary to meet a need.

You might look at the IRA Withdrawal Calculator and Roth Analyzer at the Retire Early Home Page. See link:

http://www.geocities.com/WallStreet/8257/softlist.html

Using this Excel spreadsheet, I came to much the same conclusion as TMPixy. It made more sense to withdraw from my IRA first and let my 100% stock, LTB&H taxable account continue to grow intact.

intercst
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"haf tu" at
age 71.5 to start the draw from tax-deferred acounts

Am I wrong????? I have continualy been told 70.5!!!

What's right???

hvyevy2
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Hvyevy2 writes:

<<"haf tu" at
age 71.5 to start the draw from tax-deferred acounts

Am I wrong????? I have continualy been told 70.5!!!

What's right???>>


My guess is the post contained a typo. The account owner must begin withdrawals from a traditional IRA no later than April 1 of the year following the year in which he/she attains age 70 1/2. If postponed to that date, then a second withdrawal must occur no later than December 31 of that same year.

Regards..Pixy
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My guess is the post contained a typo. The account owner must begin withdrawals from a
traditional IRA no later than April 1 of the year following the year in which he/she attains age 70
1/2. If postponed to that date, then a second withdrawal must occur no later than December 31 of
that same year.

Regards..Pixy


Thanks for your generousity, Pixy. That post was from the Foolish (absent minded) Prof. Somewhat of a slip of the gears. For me it works out to be about 71.5, but only because my birthday is Oct 16: April 16 equals 70.5; Oct 16 equals 71; then April 1 almost equals 71.5.

Your last sentence is pretty important. It means I don't want to wait until 71.5 and get a double hit on income tax.

FoolishProf
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FoolishProf sez:

<<Your last sentence is pretty important. It means I don't want to wait until 71.5 and get a double hit on income tax.>>

Yep. Based on your birthdate, I would do it in the same year I reached 70 1/2 rather than waiting until April 1 of the following year. Folks often forget that waiting causes a double withdrawal in the first year minimum required distributions are taken. That can be very unpleasant from an income tax standpoint.

Regards..Pixy
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Thanks for the answers. I wasn't quite sure what the issues to consider were. I realize that with regards to the IRA, there is pre-59 1/2, pre-70 1/2, and post-70 1/2. Plus, there is the question of what the regular savings is invested in - CDs/bonds, dividend-paying stocks, or pure growth stocks.

Since the annuity can't be touched, its not an issue, and the consensus seems to be to leave the Roth alone.

Zev
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