Withdrawing taxable investments question

[Anonymous]

I realize I need an actual financial professional to fully explain this but in the meantime I’m just curious at what others think.

I retired in my late 50’s with a pension paying me 100% of my final years salary plus a yearly COLA. My wife and I also receive free medical for life and our home is paid off, kids are out of college. Obviously we live comfortably on this amount but we also have three taxable investment accounts with a combined value of well over a million.

I have no issues with actually spending this investment money but seeing that all three are taxable, how do I slowly start withdrawing and at the same time do it slow enough so that I don’t throw myself into a higher tax bracket? On two of them I have to start withdrawing at 70 1/2 anyway. Is there any rule of thumb on withdrawing slowly over time simply because of the tax ramifications?

I currently really don’t have a need for these funds but at the same time I realize it’ll take many years to slowly withdraw it without killing me with taxes.

[Anonymous]

Do the accounts have significant capital gains? What kind of investments are in them?

"Throwing yourself into a higher tax bracket" isn't really a concern. Long-term capital gains tax rates are 0%, 15% or 20% depending on your taxable income and filing status. That's likely a lower rate than you are paying on your pension income.

[Anonymous]

You need to be careful in your lingo. Most people consider "taxable accounts" to be the account you saved in on your own without any tax incentive (beyond capital gains tax rates). If you have to withdraw (RMDs) from two accounts at 70.5 (now 72 actually) those are generally called tax-deferred accounts.

If you really want to game the system and your existing plans allow it, you could do partial withdrawal/rollovers of your tax-deferred accounts to an IRA up to the next tax bracket (or the tax bracket you will be once you take RMDs) and then do a Roth conversion.

Tax-deferred withdrawals are taxed at ordinary income, not capital gains.

When to tap the taxable account which does get capital gains tax treatment is probably worth investigating but offhand I would think you would touch that last.

This is the kind of thing Bogleheads are all over.

[Anonymous]

^^^ I'm 8:14. Now I see the reference to RMDs in the OP. Yes, OP, these are not TAXABLE accounts. These are tax DEFERRED accounts, like an IRAs or 401.

Distribution plans can get a little complicated, but since capital preservation isn't important, i.e. you don't need this money to last your lifetime because of your other sources of income, I wouldn't over-complicate it. If you want or need a little extra income now, take it. If not, Wait until RMDs kick in at 72 (the law just changed the requirement from 70.5).

[Anonymous]

Definitely go to Boggleheads and post there. You’ll get great and knowledgeable advice.

[Anonymous]

I agree that bogleheads would be better.

From what you say it seems like you have the following assets

1) a very healthy pension
2) home equity
3) 2 traditional IRA's and or other type of tax deferred accounts (401k/TSP/403/457 etc.) that require RMD's
4) the third account is a normal taxable investment account or maybe a roth IRA/457/401k/403

you should seek professional financial planning tax planning advice, but I think what you are trying to get at is that you have a very good problem: your pension provides a baseline of ordinary taxable income such that RMD's from your tax deferred accounts once you hit 72 may be taxed at a high rate.

as alluded to in the prior post this brings up the issue of whether or not you should use the years between now and when the RMD's come to convert some of your tax deferred accounts to a roth accounts. This is pretty much an estate planning question and will be influenced by what you wish to optimize and what tax/legislational risk you are willing to take. your charitable desires are also an important consideration in all this.

with more detail on the exact numbers in terms of pension amount, type of account, expected annual tax deductions, where you live, what you desire to leave behind, etc. i'd be happy to provide some more thought/analysis.

to make things more complex, the considerations recently just changed significantly with the passage of the SECURE Act

Here are some relevant links to ge started.

https://www.marketwatch.com/story/think-twice-before-converting-to-a-roth-ira-to-avoid-rmds-2015-01-12
https://www.forbes.com/sites/nextavenue/2020/12/31/6-ways-the-secure-act-may-impact-your-retirement/
https://www.fidelity.com/viewpoints/retirement/roth-ira-conversion-after-50
https://www.kiplinger.com/article/taxes/T055-C001-S002-retirees-reduce-your-rmds-with-a-roth-conversion.html
https://investor.vanguard.com/ira/roth-conversion
https://ballastplan.com/pre-rmd-social-security-roth-conversions/

[Anonymous]

I am also struggling with this. I feel I do well on the investment side of things but really do not understand the tax end of things.

Timing the tax hit of RMDs seems challenging. Roth conversions seem to trip off people's tongues in these posts and it seems quite complicated figuring whether one is eligible to do it and how it is done.

Where does one go for tax planning advice that does not also include investment advice except to the extent it positions one better for tax purposes?

[Anonymous]

Thanks for the suggestions. The three investment accounts are a 457, 401k and a personal brokerage account. The first two are obviously tax-deferred and we’ve already moved the money into more conservative funds simply so we don’t run the risk of losing anything. The brokerage account is a mix of various stocks I’ve purchased over the years. It was originally sort of a hobby type account to throw some money at but fortunately or unfortunately, it’s done very well.

I’m at the point in life that I feel we have more than enough to live comfortably so I no longer wish to play the market. In a perfect world I’d love to simply cash it all out and live happily ever after minus the taxes owned.

[Anonymous]

Anonymous wrote:I realize I need an actual financial professional to fully explain this but in the meantime I’m just curious at what others think.

I retired in my late 50’s with a pension paying me 100% of my final years salary plus a yearly COLA. My wife and I also receive free medical for life and our home is paid off, kids are out of college. Obviously we live comfortably on this amount but we also have three taxable investment accounts with a combined value of well over a million.

I have no issues with actually spending this investment money but seeing that all three are taxable, how do I slowly start withdrawing and at the same time do it slow enough so that I don’t throw myself into a higher tax bracket? On two of them I have to start withdrawing at 70 1/2 anyway. Is there any rule of thumb on withdrawing slowly over time simply because of the tax ramifications?

I currently really don’t have a need for these funds but at the same time I realize it’ll take many years to slowly withdraw it without killing me with taxes.

Add up all your taxable income: pensions, social security, dividends, etc. Subtract your deduction from it ($24k for standard or more if you itemize). Then enough income out of the 401k and/or the 457 yearly to fill up to the top of the tax bracket that you’re currently in. And then live the easy life.

Let your heirs get the untouched taxable brokerage account on your passing so they’ll get the stepped-up cost basis (this saves your family $15,000 for every $100k passed on). If they end up either with 457/401k, having to pay ordinary income taxes on it isn’t the end of the world.