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One thing I just noticed on page 96 of that document is the idea of combining a Roth with an IRA for the purposes of increasing the total balance in order to calculate a higher distribution - but then to only take the distributions from the IRA, leaving the Roth untouched and avoiding the unqualified tax issue. Anyone have thoughts on that?
Good grief - the thread that just keeps on giving!Following up on my own post, it looks like it is allowable that the Roth balance can be combined with an IRA to calculate the withdrawal amount but not have any withdrawals come from the Roth. This is a revelation for me and makes a huge difference for people with large TSLA earnings in a Roth trying to get a higher withdrawal amount from a 72T without losing the tax advantage.
Below is just a forum response but is consistent with other sources and I've found nothing to contradict it. Also, it just makes sense to be able to include a Roth in the calculation because the whole idea is to make sure that you have enough money to last.
Yes, you can have a SEPP plan using both a Roth and TIRA account in the same plan. You do NOT have to pro rate between the two, you can take your annual total in any combination you wish between the two and that includes taking nothing from the Roth if you wish. If you want to take some from the Roth and the Roth ordering rules result in your taking a distribution of conversions under 5 years, do not worry about a penalty because the SEPP exception will eliminate the conversion 5 year holding penalty as well. Earnings come out last and will be taxable until you reach 59.5 and also have 5 years from your first Roth contribution year. You can manage your tax bill by taking selective distributions from one or the other IRA types, but there are more moving parts, so be very careful. You will also need an 8606 to report the Roth distributions.
Good grief - the thread that just keeps on giving!
The idea of taking multiple IRA type account balances and using that to calculate the withdrawal amount, but then take it all from the IRA (and none from the Roth) -- that never occurred to me. I've been assuming that each different IRA would need it's own SEPP, which sort of leaves any smallish IRAs out of the picture.
But if I can add the Roth and Rollover IRAs together and then take the withdrawals only from the Rollover - oh this has possibilities.
If anybody else has links or insights into this approach I'd be grateful for that info. If I learn anything down this path I'll relay it as well.
Is it better to draw money from an IRA, before required withdrawals, even if you have plenty in a regular brokerage account?The idea is to take money out of the taxable IRA a little at a time to keep the tax bracket low
Good question. My approach (at 64 with 80% of marketable securities in Trad. and Roth IRAs) is to spend down the non-IRA monies before touching any of the tax-deferred or untaxed assets in the IRAs. Very interested to see alternative approaches, so thanks.Is it better to draw money from an IRA, before required withdrawals, even if you have plenty in a regular brokerage account?
Probably not.Is it better to draw money from an IRA, before required withdrawals, even if you have plenty in a regular brokerage account?
It may be better if you expect to have significant a RMD starting at age 72 and you can pay a lower rate on some of that by withdrawing now.Is it better to draw money from an IRA, before required withdrawals, even if you have plenty in a regular brokerage account?
NOT-ADVICE. And since my own thinking / plans are completely at odds with financial planners / advisors advice, really really do your own diligence here. Consider my own thoughts to be another way to think about things for yourself; we all make our own decisions and experience our own consequences.Is it better to draw money from an IRA, before required withdrawals, even if you have plenty in a regular brokerage account?
This is generally my view but it fascinating to read the other approaches above.It may be better if you expect to have significant a RMD starting at age 72 and you can pay a lower rate on some of that by withdrawing now.
Not advice: In your specific case, it seems like the 10% penalty may worth absorbing to boost your standard of living in the near term. (After spending post tax brokerage).NOT-ADVICE. And since my own thinking / plans are completely at odds with financial planners / advisors advice, really really do your own diligence here. Consider my own thoughts to be another way to think about things for yourself; we all make our own decisions and experience our own consequences.
My own thinking here, but that I haven't yet implemented, is that I've got ~7 years to go until I have full access to IRA accounts. The advice I've gotten from financial advisors is to use the brokerage for that time period, spending it down to nothing if necessary, and allow the retirement accounts to grow unhindered during that time period.
That makes a lot of sense to me, as long as what one is optimizing for is "most money" for life, and/or "most money" to pass along to the next generation.
For my wife and I there is no next generation. And the pile is big enough that the primary question is exactly how much we'll give away while we're alive, and then when we pass on. There is also a question of cash flow, tax impact from selling low cost basis assets, stuff like that which would occur spending down the brokerage to 0 during that 7 years.
Which means, oddly enough to me, that the next few years to retirement account access will be our 'toughest' financially as we only otherwise have about 1/3rd of the portfolio available to spend on stuff we want. These are also the years that we would like to be spending the most money on ourselves / lifestyle (I assume this to be a steadily decreasing amount as we grow older).
So we do have plenty in the brokerage AND I'm strongly considering starting a SEPP against the IRA accounts anyway. We are easily generating the income needed to cover the SEPP distributions inside of the IRAs and despite the high tax bracket we're in, we would have that much incremental income today.
We would be giving up a lot of value in that 7 year time frame when we'd have unpenalized access to the money in exchange for the income today. But if we only have an extra 3 piles over what we need for ourselves instead of an extra 5 piles - does that really matter? We'd have 2 fewer piles to give away, so that is something (I made up those numbers to be directionally accurate - future results will be different ).
My own way of thinking about this - better income and cash flow dynamics this decade in exchange for a smaller pile to give away later seems like a good trade.
The tax man will also be happier. While I don't want to spend more on taxes than necessary, I also don't put lowering my tax bill very high in my decision making criteria.
EDIT to add: The SEPP now won't help us from a tax point of view, by getting us access to money now at a lower tax bracket than it'll be later (assuming tax law / brackets are unchanged over time), so this particular driver doesn't influence my own thinking for my own situation.
That's an interesting point, and something I should also think about. Paying penalties is still tough for my wife and I. Call it a penalty and we don't want it, whatever it is There are habits of thought and behavior that we've learned over our adult lives that aren't necessarily the best for us at this point in our lives. I have learned that those habits don't change overnight, whether I want them to or not.Not advice: In your specific case, it seems like the 10% penalty may worth absorbing to boost your standard of living in the near term. (After spending post tax brokerage).
Yeah, 10% is 10% less which grates on ones's optomization function, but if you are already at a 24% tax bracket + state , it's less of a relative change.That's an interesting point, and something I should also think about. Paying penalties is still tough for my wife and I. Call it a penalty and we don't want it, whatever it is There are habits of thought and behavior that we've learned over our adult lives that aren't necessarily the best for us at this point in our lives. I have learned that those habits don't change overnight, whether I want them to or not.
Being ready to just pay the penalty has the highly desirable virtue of being really, really flexible. H'mm.... It's also a lot easier to setup (no setup needed) and do the paperwork for (no paperwork needed - broker reports the distribution, and TurboTax calculates the 10% penalty).
Hopefully you've visited the insurance marketplace.What do you think for health insurance (US)? COBRA will only take me so far...
My kids can stay on mine until they're 26, which is great. Now I wish the law would update and I could get on theirs!
Depends a lot on your income. If you can arrange to keep your income low, you can get a basic plan through the ACA marketplace for free. If you are over the income limit it can get expensive. That's something you might want to consider before setting up a SEPP plan or other income stream! (This stuff may have changed in the three or four years since I was last on ACA.)What do you think for health insurance (US)? COBRA will only take me so far...
My kids can stay on mine until they're 26, which is great. Now I wish the law would update and I could get on theirs!
I want to emphasize this, as I see plenty of people not understanding it. Catastrophic varies for people and thus the level that can be self insured.My general view on insurance is that it is to protect from catastrophic losses that I couldn't otherwise afford — I can just self insure for the little stuff.
I'm on COBRA this year as well, but I plan to use ACA starting next January. I'm in California, so I can qualify for different state and federal subsidies based on my income level. The trick is to keep your income at whatever subsidy level you desire. I'm not sure if your state has subsidies but it's worth checking out. In my case, the ACA plans with subsidies are much lower than the COBRA premiums. The only reason I'm using COBRA this year is due to the pandemic subsidy, which effectively cut the premiums in half for the year.Depends a lot on your income. If you can arrange to keep your income low, you can get a basic plan through the ACA marketplace for free. If you are over the income limit it can get expensive. That's something you might want to consider before setting up a SEPP plan or other income stream! (This stuff may have changed in the three or four years since I was last on ACA.)
Prior to ACA, I bought the least expensive high deductible plan I could find and opened a Health Savings Account with the maximum allowable contribution each year (Fidelity offers HSAs). It is really hard to parse health plans because there are so many moving parts. My general view on insurance is that it is to protect from catastrophic losses that I couldn't otherwise afford — I can just self insure for the little stuff. Hence, the high deductible plans. I can come up with $6000 or $7000 to cover the deductible if I have to. For those with expensive chronic health conditions the calculation might be different.
In twenty years of buying my own health insurance plans I only exceeded the deductible once. That's the way I like it — stay healthy and let someone else use the insurance pool! (Same with car and house insurance.)
I'm on COBRA this year as well, but I plan to use ACA starting next January. I'm in California, so I can qualify for different state and federal subsidies based on my income level. The trick is to keep your income at whatever subsidy level you desire. I'm not sure if your state has subsidies but it's worth checking out. In my case, the ACA plans with subsidies are much lower than the COBRA premiums. The only reason I'm using COBRA this year is due to the pandemic subsidy, which effectively cut the premiums in half for the year.
BTW, thanks to everyone for this thread. It's been super informative.