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Author: loreng4779 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75383  
Subject: Retirement fund distributions Date: 8/2/1999 11:28 AM
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My retirement funds are 40% taxable, and 60% tax-deferred (IRA etc). Does anyone have a formula, calculator, or even a rule-of-thumb to guide me in determining which I should take distribution from first for retirement living expenses. I'm 66, the IRA is of a size that would make minimum required distributions at age 70 probably taxable at 28% and some of social security benefits taxable too. My first instinct is to take the regular investments first and let the IRA grow tax-deferred; but it might be better to take from IRA now to keep required minimum distribution lower when that time comes. Any help?
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Author: WilliamLipp Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12708 of 75383
Subject: Re: Retirement fund distributions Date: 8/2/1999 12:40 PM
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loreng4779 Date: 8/2/99 11:28 AM Number: 12702
My retirement funds are 40% taxable, and 60% tax-deferred (IRA etc). Does anyone have a formula, calculator, or even a rule-of-thumb to guide me in determining which I should take distribution from first for retirement living expenses.

I'm sure I don't have a complete answer. One piece, though, is that I would ensure the IRA withdrawals were at least enough to max out the 15% tax bracket. If that turned out to be more than you wanted to spend, I'd reinvest it taxable on the grounds that 20% capital gains will be a better deal than 28% income.

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12710 of 75383
Subject: Re: Retirement fund distributions Date: 8/2/1999 12:44 PM
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Greetings, Loreng4779, and welcome. You wrote:

<<My retirement funds are 40% taxable, and 60% tax-deferred (IRA etc). Does anyone have a formula, calculator, or even a rule-of-thumb to guide me in determining which I should take distribution from first for retirement living expenses. I'm 66, the IRA is of a size that would make minimum required distributions at age 70 probably taxable at 28% and some of social security benefits taxable too. My first instinct is to take the regular investments first and let the IRA grow tax-deferred; but it might be better to take from IRA now to keep required minimum distribution lower when that time comes. Any help?>>

The old rule of thumb used to be to draw down your taxable investments first to allow continuation of tax deferred compounding within IRAs as long as possible. I'm in the middle of a study now, though, based on a hypothetical long-term buy and hold investor with !/3 of a portfolio in a taxable account and 2/3 in an IRA. Assuming a withdrawal rate of 5% of the initial portfolio that increases with inflation each year, the study is indicating that for overall tax impacts (during and after life), the total tax burden to the family is less taking the distribution from the IRA first. Obviously, much depends on withdrawal rates and the rates of return in the taxable account versus that of the IRA. Still, when assuming the same rate of return in both the taxable and the IRA, my preliminary results indicate the family is better off if the money comes first from the IRA that's taxed at ordinary rates.

All you can do is make your assumptions, and then run the spreadsheet comparisons to see what it looks like in your case.

Regards..Pixy

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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: 12713 of 75383
Subject: Re: Retirement fund distributions Date: 8/2/1999 2:07 PM
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Pixy writes,

The old rule of thumb used to be to draw down your taxable investments first to allow continuation of tax deferred compounding within IRAs as long as possible. I'm in the middle of a study now, though, based on a hypothetical long-term buy and hold investor with !/3 of a portfolio in a taxable account and 2/3 in an IRA. Assuming a withdrawal rate of 5% of the initial portfolio that increases with inflation each year, the study is indicating that for overall tax impacts (during and after life), the total tax burden to the family is less taking the distribution from the IRA first. Obviously, much depends on withdrawal rates and the rates of return in the taxable account versus that of the IRA. Still, when assuming the same rate of return in both the taxable and the IRA, my preliminary results indicate the family is better off if the money comes first from the IRA that's taxed at ordinary rates.

I agree. I went through the same analysis 5 years ago when I retired and decided it was better to take SEPP withdrawals from my IRA and keep my LTB&H, 100% stock, taxable account intact.

Down the road, your hiers would rather get a $1 million taxable account (where they get the stepped up basis and pay taxes at the capital gains rate) rather than a $1 million IRA (where everything is taxed as ordinary income.)

intercst

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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12714 of 75383
Subject: Re: Retirement fund distributions Date: 8/2/1999 2:22 PM
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intercst: you wrote, in part, "Down the road, your heirs would rather get a $1 million taxable account (where they get the stepped up basis and pay taxes at the capital gains rate) rather than a $1 million IRA (where everything is taxed as ordinary income.)"

It sounds like you were comparing to a regular IRA. Would not the analysis change if you were talking about a Roth IRA - no taxes at all?

Also, as I understand the Roth IRA, it has no required minimum withdrawals during the contributors lifetime; thus you would never be "forced" into a higher bracket by required withdrawals..

Curious. Regards, JAFO

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12719 of 75383
Subject: Re: Retirement fund distributions Date: 8/2/1999 3:54 PM
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JAFO asks:

<<It sounds like you were comparing to a regular IRA. Would not the analysis change if you were talking about a Roth IRA - no taxes at all?

Also, as I understand the Roth IRA, it has no required minimum withdrawals during the contributors lifetime; thus you would never be "forced" into a higher bracket by required withdrawals..>>


I can't speak for Intercst, but I'm doing such a comparison baed on a conversion of a rollover IRA. While it does a better than using the taxable account first, it fares far worse than keeping the traditional IRA and taking money from there first.

Regards..Pixy

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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12722 of 75383
Subject: Re: Retirement fund distributions Date: 8/2/1999 4:35 PM
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TMFPixy write "I can't speak for Intercst, but I'm doing such a comparison based on a conversion of a rollover IRA. While it does a better than using the taxable account first, it fares far worse than keeping the traditional IRA and taking money from there first."

Would not all the usual conversion issues come into play. For example, how close to retirement one is, where the dollars to pay taxes are coming from, etc., as you discuss thoroughly in your article.

Might it not be different for a 25-30 year old who is relatively early in the planning process and not affected by a large conversion, especially if the annual $2000 contributions grow to a large amount over 30 years.

Just curious. Keep up the good work; I am amazed at your resilience in dealing with all us other posters.

Regards, JAFO

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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12723 of 75383
Subject: Re: Retirement fund distributions Date: 8/2/1999 4:37 PM
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Corrected and resubmitted.

TMFPixy writes "I can't speak for Intercst, but I'm doing such a comparison based on a conversion of a rollover IRA. While it does a better than using the taxable account first, it fares far worse than keeping the traditional IRA and taking money from there first."

Would not all the usual conversion issues come into play? For example, how close to retirement one is, where the dollars to pay taxes are coming from, etc., as you discuss thoroughly in your article.

Might it not be different for a 25-30 year old who is relatively early in the planning process and not affected by a large conversion, especially if the annual $2000 contributions grow to a large amount over 30 years?

Just curious. Keep up the good work; I am amazed at your resilience in dealing with all us other posters.

Regards, JAFO

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12725 of 75383
Subject: Re: Retirement fund distributions Date: 8/2/1999 5:06 PM
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<<Might it not be different for a 25-30 year old who is relatively early in the planning process and not affected by a large conversion, especially if the annual $2000 contributions grow to a large amount over 30 years.>>

Sure, that's a big consideration. Keep in mind, though, that employer-provided retirement plans come into play in the older years. Those are fully taxable and for many will still comprise the bulk of portfolio assets for the next 20 years or so.

Regards..Pixy

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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: 12728 of 75383
Subject: Re: Retirement fund distributions Date: 8/2/1999 6:31 PM
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JAFO31 asks,

intercst: you wrote, in part, "Down the road, your heirs would rather get a $1 million taxable account (where they get the stepped up basis and pay taxes at the capital gains rate) rather than a $1 million IRA (where everything is taxed as ordinary income.)"

It sounds like you were comparing to a regular IRA. Would not the analysis change if you were talking about a Roth IRA - no taxes at all?

Also, as I understand the Roth IRA, it has no required minimum withdrawals during the contributors lifetime; thus you would never be "forced" into a higher bracket by required withdrawals..

Curious. Regards, JAFO


You're correct that your hiers would pay no income taxes on a Roth IRA (although estate taxes would still apply.)

I looked at a Roth conversion for myself, but since I was already well into the 28% bracket, it didn't make sense to me to do most of the rollover at the 31% bracket. Also, I would have had to sell stock (and pay the 20% capital gains tax) to raise cash to pay the income taxes on the Roth conversion.

I may have an unusual view of the Roth IRA. I view it as a bet against your future tax bracket. If I was in the 15% bracket, I would bet that 15% is probably the lowest tax bracket I'll see in my lifetime. I would fund a Roth (or convert an existing IRA to a Roth) until I maxed out the 15% tax bracket. At the 28% or 31% bracket, a Roth IRA is less attractive to me (although others can reasonably differ with me on this point.) If I find myself in the 39.6% bracket 10 or 20 years down the road, I'll have plenty of money to pay the taxes. If the stock market declines and I'm in the 15% bracket 10 or 20 years from now, I would really regret having rolled over into a Roth at the 28% or 31% bracket. Under those circumstances a Roth conversion at 28% would reduce the after tax income for a retiree who finds himself in the 15% bracket in retirement. My reasoning was an extra dollar of income would mean more to me if I was in the 15% bracket than an extra dollar if I found myself in the 39.6% bracket, so I opted not to do a Roth conversion.

intercst

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Author: dharmadollars Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12778 of 75383
Subject: Re: Retirement fund distributions Date: 8/3/1999 8:40 PM
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As a follow-up to posts 12709 and 12710, one additional piece of strategy might be considered: do a cash out refinance on your residence, creating a large a mortgage as possible.

Invest this lump sum in a tax efficient vehicle. I will forego specific recommendations here; go for long term growth as opposed to income.

Make withdrawals from the tax sheltered account to make interest payments on the mortgage. These dollars will escape taxation. The lump sum will continue to grow.

Devise strategies for passing assets to heirs, if this is an issue. Consider split interest purchases of assets with your heirs, with you and/or your spouse as life tenants, and your heirs as remainderpersons. Upon your death the assets are no longer in your estate. Or consider an IDIT (intentionally defective irrevocable trust).

These above suggestions are triggered only in part by the initial mortgage suggestion, which was offered as a means of getting maximum mileage out of the tax sheltered money.

Hope these suggestions further your research.

Regards--dharmadollars

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