Spend down Taxable IRA now vs Taxable

[mnfish]

With the new changes to IRA inheritance, is anyone here considering this or currently doing this? I'm single and I do consider my 2 daughters important in my investment planning.

From a blog by Kristi Sullivan, CFP 
The Standard: This is the most recommended method. Spend down, in this order: taxable accounts, tax deferred accounts, and Roth IRA accounts. Lots of benefits here to the retiree. You are holding your tax rate down in the early retirement years where you presumably spend the most while tax-deferred and tax-free accounts continue their tax-advantaged growth.

The disadvantage here is if you leave a large bucket of tax-deferred money to your non-spouse heirs. It’s likely they will be inheriting this money during their highest earning years, subjecting the withdrawals over the 10 years following your death to very high income taxes. Also, it’s nice for heirs to receive taxable assets because there is no requirement to withdraw, and they (currently) would get a step-up in cost basis.

Flip the Standard: This method has you spending tax-deferred assets, taxable accounts, then Roth (or combining Roth with tax-deferred). Advantages are that you are spending down the tax-deferred accounts before RMD time, so reducing that hit later.

In this instance you are paying the taxes on your children’s inheritance. This may or may not be important to you. That is why this is part art, part science.

My taxable account is over twice the amount of my TIRA and it seems prudent to switch my withdrawals and "Flip the Standard."

[Deleted]

Very good alternative approach. I have had a similar goal for my heirs but my income is sufficient so I'm not spending down at all. My approach has been aggressive TIRA to Roth conversion and all RMD's go to taxable. This has built taxable and Roth accounts and decreased TIRA. We plan to update our home and buy a Mach-e with TIRA money. Our two kids may get only tax free money.

[steadyeddy]

Managing tax impacts of our actions is a fascinating subject when we are drawing down from our nest egg to spend for living.

In general, I am less likely to worry a lot about tax implications on my heirs due to their inheritance. I would rather optimize the tax implications for myself & the wife.

[johntaylor]

Because continuing "...their tax-advantaged growth" matters, perhaps run sample numbers?

[Chahta]

Seems that once RMDs start that is how it works anyway. At least Roth conversions are in order before RMDs.

I do not care if there is anything left for heirs so I do what is best for me now.

[Fearchar]

Here is the rub...

Not all taxable accounts are the same. They vary a great deal depending on the amount of unrealized capital gains.

So, to spend means you sold and selling means you realized capital gains.

Beyond a certain age, one must withdraw and pay taxes on IRAs. If you have low expenses, you may find no reason to sell taxable accounts because RMDs more than cover needed spending.

[Fearchar]

Jun 15, 2023 13:23:23 GMT @axe said:

Very good alternative approach. I have had a similar goal for my heirs but my income is sufficient so I'm not spending down at all. My approach has been aggressive TIRA to Roth conversion and all RMD's go to taxable. This has built taxable and Roth accounts and decreased TIRA. We plan to update our home and buy a Mach-e with TIRA money. Our two kids may get only tax free money.

Inheritances may start as tax free initially. However the rules will drive withdrawals and eventually the funds will be subject to taxes

[liftlock]

There no single strategy that is best for all.  The best strategy is likely to depend on the long term income tax picture for you and possibly your heirs.  Asset allocation to minimize income taxes may also be a factor.

I suspect most people will want to take of themselves before prioritizing what is good for their heirs.  I asked my kids what they would prefer.

I think it is important to understand what one's income tax picture will be once RMDs from tax deferred accounts kick in.  It may make sense to drawdown tax deferred accounts first to avoid moving into higher marginal tax brackets down the road.  It may also makes sense to retain funds in tax deferred accounts for long term care.  Any allocation to taxable bonds is best held in tax deferred accounts for tax efficiency.

One may be able to withdrawal funds from a combination of taxable or Roth accounts to prevent or delay moving into higher income tax brackets.

Retirement planning software can help maximize one's lifetime after tax income by smoothing income and identifying the most tax efficient withdrawal strategy.

Heirs benefit greatly by inheriting individual stocks or growth funds held in taxable at a stepped up basis.  Heirs also benefit greatly by inheriting Roth IRA accounts.

[steelpony10]

Chahta ,

      My opinion is I don’t think 2 of my heirs care either. If any one of them is dependent on me still in old age ………

      Wait till they find out most goes to Lola and the rest to the other 2. 🤫

[archer]

I am in the same situation of as the OP, considering my heirs. I am depleting my deferred first, as this will be taxed as ordinary income for them, and me too for that matter. My taxable account is taxed at a lower rate, and will be for my heirs also.

There is a twist to the above. I was gifted a lump sum so that I could retire earlier than planned. So, I am actually living off of the taxable and depleting my tax deferred account via roth conversions since I have no other taxable income. I am also taking this opportunity to delay SS since longevity seems to be a thing in my family.

In a couple years I will be drawing SS in excess of my needs, depositing the surplus into taxable, and continue with small roth conversions every year. The end result will be a spent down tax deferred account, and money in Roth and taxable to bequeath.

[Deleted]

I am going to follow Flip the standard, because Cap Gain tax is less than my ordinary bracket for taxes. Trying to convert as much as i can before SSN starts at 64

Flip the Standard: This method has you spending tax-deferred assets, taxable accounts, then Roth (or combining Roth with tax-deferred). Advantages are that you are spending down the tax-deferred accounts before RMD time, so reducing that hit late

[anitya]

Has anybody done or seen work on the trade offs between long term cap gains in taxable accounts vs every thing coming out of IRAs getting taxed as ordinary income? (Not Roth IRAs)

Fearchar , have you not hacked this yet? 

[archer]

Jun 15, 2023 23:31:07 GMT anitya said:

Has anybody done or seen work on the trade offs between long term cap gains in taxable accounts vs every thing coming out of IRAs getting taxed as ordinary income? (Not Roth IRAs)

Fearchar , have you not hacked this yet? 

I have, but everyone's case is different. Capital gains have a different graduated scale than ordinary income tax brackets. CA taxes CG differently than the IRS. Then there is how it affects SS which will be different for different people.

[steelpony10]

mnfish,

This area can be a personal and legal disaster. Someone will be an executor and could make decisions or may even provide some care for you. It could be for a long while. Who inherits more for example then? There’s way bigger problems then unknown future taxes. A check in any amount could be a relief that the process is finally over.

[anitya]

Jun 16, 2023 0:44:18 GMT archer said:

Jun 15, 2023 23:31:07 GMT anitya said:

Has anybody done or seen work on the trade offs between long term cap gains in taxable accounts vs every thing coming out of IRAs getting taxed as ordinary income? (Not Roth IRAs)

Fearchar , have you not hacked this yet? 

I have, but everyone's case is different. Capital gains have a different graduated scale than ordinary income tax brackets. CA taxes CG differently than the IRS. Then there is how it affects SS which will be different for different people.

Thanks, archer.

True.  But if you are buying an ETF as a long term holding, are not you probabilistically better off buying in a taxable account than in an IRA?   (May be one day you leave CA and move to another paradise and will not be subject to those CA taxes.)  Does CA make a distinction between ordinary income and long term capital gains?  (BTW, I currently live in CA)

[archer]

Jun 16, 2023 1:48:48 GMT anitya said:

Jun 16, 2023 0:44:18 GMT archer said:

I have, but everyone's case is different. Capital gains have a different graduated scale than ordinary income tax brackets. CA taxes CG differently than the IRS. Then there is how it affects SS which will be different for different people.

Thanks, archer .

True.  But if you are buying an ETF as a long term holding, are not you probabilistically better off buying in a taxable account than in an IRA?   (May be one day you leave CA and move to another paradise and will not be subject to those CA taxes.)  Does CA make a distinction between ordinary income and long term capital gains?  (BTW, I currently live in CA)

I haven't run the numbers on withdrawals beyond what I foresee in my own future, nor for other states. True that moving to another state can change things.For heirs, taxable has its advantages because they don't have to do anything with it. For ourselves, capital gains rates go up as withdrawals increase, but so does ordinary rates on IRAs. I would guess a long term ETF in taxable will be better than than in an deferred IRA. Really, I think the only benefit of a tax deferred IRA is for the tax savings while working, assuming you will have less taxable income in retirement. 

This is the calculator I like to use for tax planning:

www.irscalculators.com/tax-calculator

[liftlock]

Jun 15, 2023 23:31:07 GMT anitya said:

Has anybody done or seen work on the trade offs between long term cap gains in taxable accounts vs every thing coming out of IRAs getting taxed as ordinary income? (Not Roth IRAs)?

Perhaps this is what you are looking for:

www.kitces.com/blog/tax-efficient-retirement-withdrawal-strategies-to-fund-retirement-spending-needs/