In What Order Should You Spend Down Your Retirement Accounts?
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- เผยแพร่เมื่อ 1 มิ.ย. 2024
- In this video, we'll discuss how to optimize the tax efficiency of your retirement withdrawals. New Retirement: go.robberger.com/new-retireme...
Many retirees have up to three account types: taxable, tax-deferred (e.g., traditional IRA), and tax-free (Roth IRA or HSA). The conventional wisdom tells us to spend the taxable accounts first, then the tax-deferred, and finally the tax-free. It turns out that this approach is rarely optimal.
By making a few adjustments to the conventional approach, particularly in early retirement, we can increase our after-tax spending and the longevity of our portfolio.
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While still working as a trial attorney in the securities field, I started writing about personal finance and investing In 2007. In 2013 I started the Doughroller Money Podcast, which has been downloaded millions of times. Today I'm the Deputy Editor of Forbes Advisor, managing a growing team of editors and writers that produce content to help readers make the most of their money.
I'm also the author of Retire Before Mom and Dad--The Simple Numbers Behind a Lifetime of Financial Freedom (amzn.to/3by10EE)
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As others have informed me, it appears that ORP is, unfortunately, not updated with current tax laws. I've reached out to the creator of the tool and will let you know if I hear anything back.
@rob_berger Great video 💰 I’ve got a question combining this video’s topic and the one on 3 Bucket Strategy. Assume the funds to invest are evenly spread across the three account types (Roth, IRA, after tax Brokerage) and you want to implement a 3 bucket strategy. Given the differing times of consumption for each account type, does each investment account have the exact same 60/40 balance via the same investment products? Should an all-in-one (I.e. vanguard’s lifestrategy growth) be in each (to keep the rebalancing feature of those products)?
Hi Rob: can you start a section on your website for Canadians? Thanks so much for all your work, you are my favorite financial TH-camr right after Rational Reminder.
Fantastic original content. Definitely not your recycled garbage that your average 20-year-old TH-cam financial channel puts out.
Great key concepts for the win
Rob, excellent content and discussion today! I appreciate the time and effort you put into your channel and the content you produce. I'm almost 75 and 12+ years into my retirement journey. I wish there was content like today, when I was younger and approaching retirement. I would certainly have approached it differently. I pray your younger viewer listen, learn and do it!! Thanks for all you do Rob. Larry
25 and taking notes!
@@Baylor117 Excellent! You will be glad you did. Listen, learn, develop a plan, implement plan, revisit annually and do not give up or deviate from it. Best of luck to you.
Rob, great video. I wish you would address more affluent households. The challenge we have is my wife and I have $2.5 million in our two IRAs. We are ages 69 and 70. We have annual Social Security income of $90,000 and a $60,000 pension. Our annual spend, including taxes is around $250K. Our taxable accounts are roughly $500,000. I believe we should be pulling from our IRAs for our annual $100,000 income needs as if we don’t we will have very large RMDs starting at age 73. We could do Roth conversions, however I think the main benefit there would be for our heirs. Would welcome your thoughts. Thanks and keep up the great work!
TWO CAVEATS: (1) From what I understand, ORP has not been updated or maintained since 2020, so it does not incorporate current tax laws/rates. According to a thread about this on the Bogleheads forum, the developer of ORP is now in assisted living. (2) New Retirement doesn't treat manually entered transfers correctly when it comes to RMDs. Specifically, manual transfers from an IRA account to a taxable account made during RMD years does not count as an RMD. New Retirement will act as if no money was moved and take the full RMD amount out of the IRA account. Have flagged this issue to the folks at NR. They acknowledge the flaw, but seem unable or unwilling to do anything about it, unfortunately.
@Rob Berger & @New Retirement
I almost skipped over this video since I (wrongly) assumed that it would be more of the same standard recommendations. Thanks for proving me wrong, and introducing some really interesting alternatives.
Rob Berger. Best financial TH-camr out there. Thanks Rob for all your efforts to continue to educate. Appreciate it.
Nice overview. Another reason to draw down on taxable IRA s first, is the death of a spouse, leading to a jump in taxes with a tax filing of single (both on standard deduction and tax bracket).
Not to mention the subsidy you would get toward health care by keeping you taxable income down. Really advantages if you retire before Medicare.
Rob is our beacon of light in the murky world of retirement planning. Thanks Rob every video teaches us more, keep up the good work 👍
ROB.. what if you need ACA subsidies..?? Perhaps you can do similar video taking subsidies into consideration.
Agree!
@Rob Berger
We need this info!
Excellent video. One thing these software can help is automate more of this. Like you select say lower my taxes and then click a button and it hows you the the options to minimize your taxes. It shouldn't be that hard in this age with all the machine learning tools.
Great info Rob!! Much appreciated! I'll be using a mix of Traditional and Roth IRA's for two years until I qualify for Medicare so I can get a good ACA subsidy!
Love the directory.thanks Rob.
Wow, excellent discussion. Regular viewer of yours, but I'm glad I found this particular video.
Great video Rob, thank you
Great video, this is the path we are taking. The one thing we do is always convert pre-tax to ROTH while filling the 12% bracket. To us it makes more sense than taking a distribution and investing in an after-tax brokerage account. Since my spouse is still working, we also have the ability to do contributions with left-over money at the end of the year. We even keep our emergency fund in our ROTH. Our ROTH has a dual personality: moderate percentage invested aggressively but still maintaining a portion for emergency fund and other near term planned expenses. It allows us to spend above our 12% AGI target ($126,600 in 2024) without going into the next tax bracket. We also like to pay our taxes the third week in December by doing a pre-tax IRA distribution withholding 99% for taxes. It does take some additional planning to hit our AGI target on December 31st.
Excellent thoughts and I do similar. Just wanted to add if you are also able to donate fully to HSA for you and your spouse, you can also increase this by $10,300 if you ($9,300 in HSA) and your spouse ($1,000 in their own separate HSA) are both over 55. So that would be $136,900 in 2024 which would keep you in the 12% AGI target and thus 0% capital gains taxes.
Do you hold CDs in your Roth for your emergencies?
@MarkCensky yes
Short term cd's and treasuries. Also MM funds since they are earning 5%.
I used to use I-ORP but it is no longer supported. The tax treatment has not been updated since 2020.
This is great, especially the article resource. Thanks Rob!!!
An excellent discussion. Thank you for sharing.
Excellent as always, thanks Rob!
As usual, great video and content. I really enjoy watching your channel. Thank you.
I really liked this discussion. Keep up the great job.
I always enjoy your content Rob! This one was exceptionally relevant for me! Thanks!
Rob, I absolutely love your channel. So informative. Thank you for all you do.
Excellent subject and content, thanks as always Rob. Exceptionally helpful.
I really studied this video and made notes. Thank You!
This is indeed really valuable. Website resources and tools are useful. Thanks Rob!
Love the expanded discussion. So many nuances that influence the optimal strategy !
Another extremely helpful video Rob! Thank You! Loving my subscription to New Retirement!
Thanks for the outstanding content, Rob! You are the master of integrative complexity.
Thanks for the excellent video. Appreciate you perfect balance of technical and practical information
Thanks, this is excellent! Also the idea you're implementing related to organizing your website is something that will be very useful. Thanks for all the great content!
Rob, excellent video! I'm pinning the Blue Ribbon on this one.
I’ve saved this video because there are so many layers and ideas. Thank you for this solid information!!
Rob, congrats on the success of your channel. I'm just an occasional viewer but I think you do a great job.
Good stuff Rob
I am so thankful for all of your information. And that you offer it for free. You are a wonderful human being.
Rob - This exactly the type of information I was looking for! Thanks for this, and all of your research.
Thank you so much. I felt that blindly spending down my taxable account first was not the best way to keep my long duration taxes low. The computer tools that you are recommending help me determine a better way to spend down my 3 types of accounts to avoid big jumps in taxes later in retirement. Rule of thumbs don't work, well because each person's plan is different, they need to use this tool. Great job!
I feel smarter after watching this video. Thank you for all of the good information.
Very helpful!
Excellent presentation. The article reviews and software demonstrations are incredibly helpful. I greatly appreciate the resource page you are creating on your website. Thanks very much.
Rob, great content! I love that you factualize your suggestions with analysis tools, and your open sharing of tools and papers is outstanding! I am starting my retirement journey and have much to learn, but you are helping me sort through it all with incredible practicality.
Fantastic video on one of the most complex issues facing retirees.
Thanks for the ORP tip. Will try it!
As always, stellar content and explanation Rob. About to jump into the white papers.
Hi Rob, great content as always. I heard about NewRetirement from you a couple of days ago and in 10 minutes of use decided to subscribe. It is mind boggling at least till the time you get familiar with it. Like you said, using this tool and running many scenarios I found Roth conversations and paying for taxes out of tax paid account is doesn’t make sense. The advantage is only slight and I agree with you 100%.
Thank you so much for this video. I've been tossing this idea around in my mind but didn't quite know how to execute it in NR. I had no idea it would be that simple and straightforward. Now I'm ready to tackle it :) Again, thank you!
Rob, does New Retirement allow you to figure PTC/ACA Obamacare credits in early retirement years to advise where to spend from? For example I am want to use some Roth early to keep under the 400% FPL.
Great video! I use several of these tools regularly as a check against each other. It helps to remove any biases in any of the tools and keeps me honest with the inputs that vary slightly from tool to tool. i-ORP extended is one of my favorites, along with FireCalc because you can vary the spending approaches.
Thanks Rob!
Thank you for all the information and research you have done for us. I am about 9 years from full retirement and now deep diving into planning for a smooth and rewarding retirement.
Great video with attached visuals. My situation is a bit different but I had zoned in on a similar strategy when my friend sent me your video. My issue is that most of my net worth is in taxable accounts with highly appreciated equity positions so the ability to unwind some of those for 0% capital gains has to be measured against the benefit of drawing down IRAs first.
Great video Rob. I'd love to see a video exploring how to factor in making charitable donations directly from an IRA to take advantage of the tax savings.
Excellent presentation, Rob! I knew that the conventional strategy was not optimal for my situation, but needed something to help me quantify that! I will try the New Retirement tool to help me plan. My goal is legacy planning, so spending down the brokerage account before the IRA's, based on my current allocation just didn't make sense. Thanks so much!
Very informative.
This explains why modeling a transfer from my IRA to my brokerage account early in retirement is helpful. It goes against conventional advice, but New Retirement said it was an improvement. Thank you!
Thank you, Rob. This topic is one I wish I'd tried sorting out much earlier in my retirement planning journey. It is complex as well as complicated. All one can do is remain flexible and diligent to enable any planning done around tax-efficient withdrawals.
One thing that would ideally be looked at in this and similar videos is the impact of losing a spouse to the tax brackets. When someone goes from married filing jointly to single filer, the federal income thresholds for the various tax brackets are slashed in 1/2. The surviving spouse may have have reduced income with the smaller of the Social security checks stopping, and maybe smaller RMD's if they take an older spouse's traditional IRAs as their own, but the lower income thresholds for the various tax brackets could mean they pay more in taxes with less in income. With a large difference in the ages of the husband and wife, the surviving spouse could live many years as a single taxpayer and be subject to these lower income thresholds to reach higher tax brackets.
First time I'd heard NOT doing Roth conversions; gonna have to read that paper. Thanks Rob!🙏
This is great. I recognized that one could tailor their taxes by drawing from multiple accounts with different tax requirements and I have New Retirment account. I just had not thought about how to implement this. Thanks for the guidance. I need to experiment with this and see how it might best use it.
As always, informative without being preachy.
Excellent information. Great insight about saving IRA money for skilled nursing care as it can be deductible and taxes will be low.
Excellent content @rob_berger - as always. Love the tool review and reference papers.
This has been great. A lot to think about. I still have a few years before this is a worry. It sounds like review annually and draw a bit from each bucket, if you have that option, annually. I have heard enough stories sbout health care costs and ACA subsidies where g8ving this its due consideration is warranted. I am glad you mentioned a lot of the factors outside of marginal tax rates
Great talk! Good to see Rom the Greatest of Spaceknights along for the ride. I haven't seen him in 45 years. I'm sure he's been busy banishing Dire Wraiths the whole time!
Very timely article for me- just going thru my 2023 tax return. Taking more income out of my IRA [primarily for house projects] in '21 and '22 not only increased my taxes [which I anticipated] but also increased the amount of taxes calculated on my social security income. If I had taken out $20,000 more in '23, it would have cost me $5,158 more in taxes- almost 26%. I'll consider a HELOC or perhaps use Roth IRA money for "special projects" in the future.
Please do not think ur teaching on this issue is something someone would want to be over quickly. UR teachings on various money issues are akin to a Hugh peace of mind... God bless you, I mean this from the bottom of my heart....
Thanks! and this reflects what I've been thinking about withdrawal strategies, but most suggestions followed the normal taxable, deferred, tax free approach, which did not make sense to me. So I kept wondering if I was missing something, but your explanation makes it very clear.
well, you have to still look at your situation. These may suit the limited scenario presented, but aren't suitable for other situations. A major flaw in the scenario presented is it assumes both spouses die at the same time. The reality is that that is not the reality. Holding onto deferred acccts means surviving spouse with a large combined deferred acct subject to RMD faces higher taxes as a single filer. That can have other negative impacts like being subject to IRMAA and taxation or higher taxation on soc sec benefit, etc.
I agree with @hanwagu9967 and I plan to do several scenarios in NR for what happens if one of us predeceases the other in say 5, 10, 15, or 20 years from now-all of those can be different scenarios in New Retirement-say… good tip! Basically, this will show better to do more conversions. I also think more conversions make sense the higher one’s wealth is, and certainly if you’re leaving a largish legacy for heirs.
Thanks, very interesting. My brain was telling me that something along these lines might make sense, but I couldn’t conceptualize it.
Tricky stuff and fascinating. Big Picture -
Unfortunately, my spouse’s eyes glaze over at anything more “complex” than a bank statement… and even that gets their heart rate going. So we will likely bias our spending and conversions to simplify things on the chance I die first, just like my father did for my mother… that means getting as much money as practical (without killing our taxes) converted into a Roth. To remove spending complexity… and avoid pushing our heirs who will likely be in peak earning years when we die, into higher tax brackets that results from inheriting tax-infested accounts.
And another reason to simplify for later life - if we both live to those later years, our mental acuity might not be what it is currently.
Yes. So true... it is not effective or efficient to look for the perfect retirement solution... I have spent 3 years interviewing "successful" retirees. Each had effective retirement setups... all were different. Real-estate, stocks and bonds, pension plans, family businesses, land leases, etc. Realize a base need, a base goal, and then build off of there with the opportunities you have. And realize things change...
Very interesting! I've been trying to run similar analyses of my own situation, and I found the the California state taxes really change the outcome, because social security is not taxable in California, so taking tax deferred money later cuts the total taxes paid.
Very helpful (better than basic conventional guidance). In a future video, would be good to go through more hypothetical examples - that show how optimization might deviate from conventional.
Hi Rob, This video knocks it out of the park! nice summary of the research and discussion of the complicated landscape. Glad to hear your comments on the Roth Conversion topic. My own simulations show the advantage is so minor that its not worth the hassle. Your website with research papers and tools is going to be killer! Thanks!
10% tax brackets
Wouldn’t that be nice!
Great video 💰 I’ve got a question combining this video’s topic and the one on 3 Bucket Strategy. Assume the funds to invest are evenly spread across the three account types (Roth, IRA, after tax Brokerage) and you want to implement a 3 bucket strategy. Given the differing times of consumption for each account type, does each investment account have the exact same 60/40 balance via the same investment products?
Those relying on the 0% tax bracket for dividends and capital gains in early retirement should look at how additional income could increase Federal tax. A Roth conversion, or just drawing income from an IRA or 401K, could push some or all of their 0% income up into the 15% bracket. If you are already collecting SS, this too is ordinary income that might push you dividends and capital gains into the taxable range.
50% rule for social security
@@GoKU-xx2vg With the standard deduction, the 0% tax bracket goes up to $63,300 for singles and double that for couples. So you will definitely be paying tax on 85% of SS, and you're more likely to be worried about IRMAA.
@@vinyl1Earthlink sorry, this is incorrect and a common error/misconception. Tax on soc sec benefit is not based on MAGI, it's based on AGI so standard deduction doesn't apply to determine if soc sec benefit is taxed. Your AGI for combined taxable income, nontax interest, plus 1/2 of your soc sec benefit., if that is less than $32k for married joint, then you pay no tax on soc sec. Standard deduction is after AGI to determienn MAGI for federal tax.
Looking forward to trying ORP.
Be sure to read the other comments (including Rob's)... apparently ORP no longer supported...
Question on the NewRetirement modeling of transfers.... So converting enough to fill up the 0% bracket is a no-brainer, filling up 10% bracket seems sensible, but how to decide whether to fill up the 12/15% bracket now when you are going to be in the 12/15% bracket in the future? Doesn't the loss of return on those rates paid this year offset any money saved later? Or is it always a net gain over the long term?
Topic suggestions: what stocks or assets do one convert that is most sensible like the unrealized losing stock or the ones who has most potential for growth?
Great content, Rob. I thought you were going to include links below our video to the two papers you recommended, but I don't see them. I did find the first paper in your site's list of research papers, but not the second one, that you show at 17:00. Where can I find that one?
Great vidow and thanks forshari g those tools. I'll try the. What do you think k of MaxiFi? I use it and like it a lot. I have the advanced version thay shows hiw much I can spend in retirement.
Great video, thanks for sharing! And GO BUCKS!
Enjoy your educational videos - in your estimate is New Retirement best suited for one nearing retirement rather than several years already into retirement? Interested in your thoughts. Thanks
Hey rob, I'm enjoying your videos. Just a couple of comments on i-orp. I've been using it for several years and do like it but some comment on it now being an unsupported site should be made. My understanding is that Mr. Welch has moved on and has not passed on updating the site to someone new. It's not clear when the last update to tax tables, RMD timing or other things were made. I still use the tool, but only for broad brush analysis. If you have any better info on i-orp's future it would be great to hear.
Also, I noticed that in the i-orp example you walked through in this post you seem to have input monthly SS and
not annual SS, an easy mistake to make.
Thanks for the info you provide, I'm looking forward to looking at some of the tools and papers on your site.
Greetings Rob; Are there any tools that incorporate The Affordable Care Act subsidies/tax breaks for those of us who are retired but aren't 65 yet? Cheers!
Aren't those state specific? That's a lot of additional complexity to add but I'm sure if you asked at NewRetirement they'd tell you if it's in their plan.
@@scoobedoo5243......I Think: Medicaid Expansion varies from state to state, not Obamacare. ACA does vary a little bit for how much they reimburse, as it's tied directly to the 2nd highest Silver Plan available in your zip code. But I don't think the subsidy percentages that decrease with increasing income vary at all.
Rob, I enjoy and get a lot from your videos/content, but.... as a guy who grew up in Michigan, the OSU football swag behind you is killing me, man! LOL 🙂
Wolverine here noticed that too - but glad I kept watching 🤣
Hi, Rob. Thanks for this video. A question for you. I understand the concept that if you currently enjoy a zero percent tax rate that you may want to avoid a higher marginal rate later in life by withdrawing from the IRA now, up to the 10% rate (or higher). However, does that analysis take into account the opportunity cost of the money you're paying in taxes? In other words, the money you would have to pay in taxes from this distribution could have stayed in an investment vehicle earning x% a year for all those years.
nice job rob. one thing i wondered about as you were changing the ira withdrawal amounts in those first couple of years was what was happening to the total value of the portfolio at the end of the plan? perhaps saving some taxes late in the plan, but what if the lost earnings in the tax deferred account is a bigger impact than the tax savings? do they not have the ability to visualize that end of plan total balances as each change is made?
Question. If you are 50 with $4 million invested having 50% in etfs based on broad indexes (Dow, Spy, Nasdaq) and 50% money market. Is this $ enough to retire? I rent a 2 bedroom apartment, no debt, no kids. I also ask because I have slight back pain sitting at PC 8 hours a day. I wonder how long I can endure it. I anticipate 6% returns but the past 30 years seem like a rosey picture. Thanks.
I would say draw down 401k IRAs and if you need more then other standard income sources to just below the 20% tax bracket then draw down long term capital gains and ROTH accounts. You would be paying the least taxes that way.
As for my self I don't have any traditional retirment accounts just ROTHs. My other source would be long term capital gains. I had planned from the start to keep my retirment as tax free as possible.
In the T Rowe Price illustration are RMD’s accounted? If the traditional IRA balance is high enough would that require a withdrawal high enough to make the strategy different or invalid? Thanks for the discussion.
@RobBerger, what are your thoughts on integrating SBLOC into the spend down plan?
Ok, I think I understand using the Roth distributions strategically to keep you at a specific tax bracket. It would need to be done very precisely, taking out just enough to get below the desired taxable income. But it would still irk me to draw down Roth, knowing that I’m giving up future tax free investment gains. That’s the advantage of drawing it last; an extra 10 to 20 years of growth, in the right mix will double your balance, guaranteed to be tax free.
Great video. It does not take in account age though. If taking from tax deferred before 59.5 yrs of age, it will incur a withdrawal penalty. In that case would going Roth conversion be better for FIRE retirees? thoughts!
Can you tell me if you have a video on whether putting RMD’s into a ROTH makes sense later in life?
I'm interested in how much of a difference there was in doing ROTH conversions, from 60 to 70, prior to SS, up to the standard deduction (so no taxes), vs spending down the IRA from 60 to 70, prior to SS, up to the standard deduction (so no taxes), with the rest coming from your brokerage account, for no taxes, in total.
Very complex indeed 😬 I guess it's good for me I don't have to go over all that not being a USA-based person
Great job going through all the different things to think about 👍🏻
you mean person not subject to USA taxation, because even if you are USA person based overseas you are still subject to US taxation.
@@hanwagu9967 Not USA citizen, not living in the USA, just watching for "fun" 🤓
@@MrBass5er i feel dirty now🤣
How do any of the calculators know what the interest, dividends and capital gains income will be for each year? I have lots of funds in my portfolio so it's just a guessing game since the markets fluctuate. Until your final 1099s are provided, it's only then when you have actual numbers. Thus, other than estimating investment income, total income is all an approximation except for fixed income like Social Security. What am I missing?