best order of withdrawal of retirement accounts.

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dred pirate
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best order of withdrawal of retirement accounts.

Post by dred pirate »

If you were in the following situation - what is the best way to set up order of withdrawals?

age 60 and 57.
Total expenses ~100k a year
Total 403b balance $2.4 million
Total Roth Ira balance $320k
Total taxable accounts $300k
Total HSA value 50k.
Have to purchase health insurance on the marketplace - no benefit from work

Taxable accounts are a mix of single stock, mutual funds (three fund portfolio), and cash.

I need to do some research, and I have time, but need to see what the max income is to qualify for ACA subsidies, (do savings count against you?)
I would think I would want to keep my income right at the limit to maximize that, which I could do by using the Roth first (and use the HSA to pay the premium).
I also know there are advantages in regards to the RMD if I use the 403b first. Plus I don't want to lose SS income because my income is too high when I start collecting it.
I am guessing everybody's situation is a little different, and directions to any resources would be appreciated.

thanks!
SnowBog
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Re: best order of withdrawal of retirement accounts.

Post by SnowBog »

I'd take a look at articles like this https://www.marketwatch.com/story/heres ... 2019-11-22 as well as similar threads on here about having roughly $100k in "income" without federal taxes.

That will give you an idea that you might want to combine different income together. Like use your 403b up to the deduction, then use capital gains.

But to manage to ACA, you'll need to hit a lower threshold...

And longer term, with your very sizable tax-deferred account, you will likely be faced with very high taxes when RMDs and SS kick in. So you may want to think of Roth conversions to attempt to spread out taxes at a lower rate over more years (paying less as a result).

The "challenge" is balancing these arguably conflicting areas...
mhalley
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Re: best order of withdrawal of retirement accounts.

Post by mhalley »

Savings do not count toward ACA, only income. So dividends from your taxable account, any Roth conversions, ira or retirement account withdrawals have the potential to push you over the cliff. You can’t use your Hsa to pay ACA premiums. Don’t come too close to the cliff as sometimes unexpected income can come in.
https://help.ihealthagents.com/hc/en-us ... th-an-HSA-
The limit for a household of 2 is only $68960, so with expenses of 100k it will be difficult to do Roth conversions etc.
Last edited by mhalley on Wed May 12, 2021 2:22 pm, edited 2 times in total.
livesoft
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Re: best order of withdrawal of retirement accounts.

Post by livesoft »

I would use tax-prep software to determine taxes for "What if?" scenarios.

I would be inclined to sell the single stock shares as needed, to do Roth conversions, and to give away appreciated shares held for at least 1 year to my DAF.
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dred pirate
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Re: best order of withdrawal of retirement accounts.

Post by dred pirate »

mhalley wrote: Wed May 12, 2021 2:12 pm Savings do not count toward ACA, only income. So dividends from your taxable account, any Roth conversions, ira or retirement account withdrawals have the potential to push you over the cliff. You can’t use your Hsa to pay ACA premiums. Don’t come too close to the cliff as sometimes unexpected income can come in.
https://help.ihealthagents.com/hc/en-us ... th-an-HSA-
stupid question - I always thought your HSA could be used to pay health insurance premium - a quick google search proves me wrong. Good thing I have saved up a good chunk of receipts from allowable medical expenses over the past years, and can cash them in and use the funds to pay the premium - so indirectly directing the funds towards the premiums

edit - looks like COBRA is eligible, but I don't think overall that is the best option
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Artful Dodger
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Re: best order of withdrawal of retirement accounts.

Post by Artful Dodger »

The "cliff" for 2021 income is 400% of federal poverty. For a family of two this equals $68,960. I don't know your state or plan cost, but if you're just below this range, your cost for a silver plan will be around $6400, whether the plan costs $12,000 a year or $24,000 a year. If you underestimate your income, and come in above 400% of fpl, you'll owe the entire premium. So it's very important.
iamblessed
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Re: best order of withdrawal of retirement accounts.

Post by iamblessed »

Artful Dodger wrote: Wed May 12, 2021 2:28 pm The "cliff" for 2021 income is 400% of federal poverty. For a family of two this equals $68,960. I don't know your state or plan cost, but if you're just below this range, your cost for a silver plan will be around $6400, whether the plan costs $12,000 a year or $24,000 a year. If you underestimate your income, and come in above 400% of fpl, you'll owe the entire premium. So it's very important.
No cliff for 2021 and 2022.
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willthrill81
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Re: best order of withdrawal of retirement accounts.

Post by willthrill81 »

I strongly recommend that you consider doing Roth conversions to the top of the 22% bracket, maybe even the 24% bracket. Due to the taxation of SS benefits, you'll very likely have a marginal tax rate at least that high once you start those benefits and especially once RMDs begin at age 72. Also, the 'surviving spouse is suddenly thrust into a higher tax rate due to RMDs' problem is very real and will very likely impact you or your spouse at some point, which is why you should consider conversions to the top of the 24% bracket.
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trueblueky
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Re: best order of withdrawal of retirement accounts.

Post by trueblueky »

iamblessed wrote: Wed May 12, 2021 8:51 pm
Artful Dodger wrote: Wed May 12, 2021 2:28 pm The "cliff" for 2021 income is 400% of federal poverty. For a family of two this equals $68,960. I don't know your state or plan cost, but if you're just below this range, your cost for a silver plan will be around $6400, whether the plan costs $12,000 a year or $24,000 a year. If you underestimate your income, and come in above 400% of fpl, you'll owe the entire premium. So it's very important.
No cliff for 2021 and 2022.
^^^ This.

ACA rules have changed. The rules for the next two years gradually charge you more for insurance through ACA, rather than the previous cliff, where if you were at 401% of the poverty level, you received no subsidy.
Wash.Invest
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Re: best order of withdrawal of retirement accounts.

Post by Wash.Invest »

iamblessed wrote: Wed May 12, 2021 8:51 pm
No cliff for 2021 and 2022.
Best withdrawal order?
Take / spend Taxable first up to 24% Fed IRS rate
Roth and HSA last (and most aggressively invested for maximum tax free earnings)

Bonus yrs for ACA 2021 and 2022
use it to your advantage;

1) Roth conversions (Your $2m+ in taxable is gonna hurt for RMD @ age 72)
2) LTCG harvest / re-adjust cost basis for future LTCG increases.
3) Adjusting investments / income in preperation for age 64

For Medicare... $176,000 income (MFJ) cap 2021, to remain within std rate plan ($148.50)
https://www.ssa.gov/benefits/medicare/m ... miums.html
Not a huge hit if you go up to $222,000 income, run your future tax numbers to see if it is worth running up to 24% Fed cap with Roth conversions ($329,850)

I used e-Money (free from Fidelity) to run 4 decades of differing retirement scenarios (including care needs and income source changes). It clearly showed the benefit of Roth conversions before and even after RMD time. My Taxable qualified is far below $2.4m

I do this as well & will use RMD > QCD after age 72
Been doing appreciated stock to DAF for 25+ yrs.
livesoft wrote: Wed May 12, 2021 2:14 pm I would use tax-prep software to determine taxes for "What if?" scenarios.

I would be inclined to sell the single stock shares as needed, to do Roth conversions, and to give away appreciated shares held for at least 1 year to my DAF.
Katietsu
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Re: best order of withdrawal of retirement accounts.

Post by Katietsu »

I would consider paying for a financial planner to run the numbers. Balancing ACA subsidies, Roth conversions, withdrawal strategies, IRMAA, SS optimization, is not straightforward. It has the potential to make a bigger difference to your financial health than investment choices.

What did you mean when you said that you do not want to lose SS income because your income is too high? SS payments are only reduced because of earned income before full retirement age. Do you mean how much of SS is taxed? Or are you thinking of IRMAA payments?
RetiredCSProf
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Re: best order of withdrawal of retirement accounts.

Post by RetiredCSProf »

Consider rolling over at least a portion of your 403b into a rollover IRA so that you can take advantage of qualified charitable donations (QCDs) from your tax-deferred retirement savings.
Exchme
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Re: best order of withdrawal of retirement accounts.

Post by Exchme »

dred pirate wrote: Wed May 12, 2021 2:20 pm stupid question - I always thought your HSA could be used to pay health insurance premium - a quick google search proves me wrong. Good thing I have saved up a good chunk of receipts from allowable medical expenses over the past years, and can cash them in and use the funds to pay the premium - so indirectly directing the funds towards the premiums

edit - looks like COBRA is eligible, but I don't think overall that is the best option
You can use HSA money to pay Medicare premiums (including IRMAA adjustments). Our plan is to use the HSA in the years prior to RMDs kicking in as we would otherwise have to sell something in taxable and pay LTCG. My understanding is gains in the HSA are taxable to your heirs, so you should spend them down at some point.
eukonomos
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Re: best order of withdrawal of retirement accounts.

Post by eukonomos »

Exchme wrote: Thu May 13, 2021 7:17 am ...
My understanding is gains in the HSA are taxable to your heirs,
...
Not just gains, but the entire balance is immediately taxable to your non-spouse heirs.
(After paying any final outstanding medical bills of the deceased.)
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dred pirate
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Re: best order of withdrawal of retirement accounts.

Post by dred pirate »

Exchme wrote: Thu May 13, 2021 7:17 am
dred pirate wrote: Wed May 12, 2021 2:20 pm stupid question - I always thought your HSA could be used to pay health insurance premium - a quick google search proves me wrong. Good thing I have saved up a good chunk of receipts from allowable medical expenses over the past years, and can cash them in and use the funds to pay the premium - so indirectly directing the funds towards the premiums

edit - looks like COBRA is eligible, but I don't think overall that is the best option
You can use HSA money to pay Medicare premiums (including IRMAA adjustments). Our plan is to use the HSA in the years prior to RMDs kicking in as we would otherwise have to sell something in taxable and pay LTCG. My understanding is gains in the HSA are taxable to your heirs, so you should spend them down at some point.
good deal- I was starting to wonder if I potentially could save too much in my HSA. If I can pay medicare premiums, at least I know I likely will spend it all down eventually
Exchme
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Re: best order of withdrawal of retirement accounts.

Post by Exchme »

eukonomos wrote: Thu May 13, 2021 7:24 am
Exchme wrote: Thu May 13, 2021 7:17 am ...
My understanding is gains in the HSA are taxable to your heirs,
...
Not just gains, but the entire balance is immediately taxable to your non-spouse heirs.
(After paying any final outstanding medical bills of the deceased.)
Thanks, guess that makes sense since contributions were deducted from your income.
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celia
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Re: best order of withdrawal of retirement accounts.

Post by celia »

Don't be short-sighted and think of one year at a time and how to keep the lowest taxes for that year. You have a "tax bomb" waiting for you when RMDs start at 72. That $2.4M tax-deferred account could double by then, making the RMD be 4% of $5M (about $200,000 and increasing each year after that). The easiest way to avoid that is to take all your withdrawals from tax-deferred, then convert the excess until near the top of the 24% tax bracket.

For more details, see this post and follow my links there.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
Phil DeMuth
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Re: best order of withdrawal of retirement accounts.

Post by Phil DeMuth »

Check out the free online app developed by ETFMathGuy to address this question:
https://app.etfmathguy.com/
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celia
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Re: best order of withdrawal of retirement accounts.

Post by celia »

dred pirate wrote: Wed May 12, 2021 1:58 pm I need to do some research, and I have time, but need to see what the max income is to qualify for ACA subsidies, (do savings count against you?)
No. Savings don't count against you, only things that show up on your tax return.

I don't know a lot about the ACA except that those on it try to keep their Taxable Income low. While looking at the long-term impact taxes will have on you, you probably also want to consider what would happen if you forego the ACA subsidies for at least a few years in order to do Roth conversions to bring down the tax-deferred balance and it's future growth, i.e., your RMDs. In other words, see if it is worth paying full price for your medical insurance in exchange for having lower taxes in your 70s and beyond.
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Artful Dodger
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Re: best order of withdrawal of retirement accounts.

Post by Artful Dodger »

iamblessed wrote: Wed May 12, 2021 8:51 pm
Artful Dodger wrote: Wed May 12, 2021 2:28 pm The "cliff" for 2021 income is 400% of federal poverty. For a family of two this equals $68,960. I don't know your state or plan cost, but if you're just below this range, your cost for a silver plan will be around $6400, whether the plan costs $12,000 a year or $24,000 a year. If you underestimate your income, and come in above 400% of fpl, you'll owe the entire premium. So it's very important.
No cliff for 2021 and 2022.
Thanks for the correction. I do remember reading about modifying the income adjustment now. That’s a big benefit while it lasts.
LeeMKE
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Re: best order of withdrawal of retirement accounts.

Post by LeeMKE »

Run the EXTENDED calculator at I-ORP.com

It will address all your questions:
which account to take withdrawals from when, and in which amount
how/if to do Roth conversions
how to remain eligible for ACA

And it is my favorite price, free.
The mightiest Oak is just a nut who stayed the course.
randomguy
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Re: best order of withdrawal of retirement accounts.

Post by randomguy »

LeeMKE wrote: Fri May 14, 2021 9:15 pm Run the EXTENDED calculator at I-ORP.com

It will address all your questions:
which account to take withdrawals from when, and in which amount
how/if to do Roth conversions
how to remain eligible for ACA

And it is my favorite price, free.
i-orp is awesome but you do have to be careful about your inputs or it will push your money into the accounts with the highest returns.

It is real easy to push taxes off in early retirement by spending down taxable. The cost though tends to be higher taxes later in life. For our couple here, there are going to be a couple of periods and the choices will likely differ. For the first 5 years both are buying ACA plans and the value of the credit is like double of what it is for the next 3 years. And then you have 3 years were one is on medicare and the other isn't. And then you need to add the effects of the age of claiming SS.

At a high level, you probably always want to be have ~25k of ordinary income (i.e. nonqualified dividends or tax deferrred account distributions) to take advantage of the standard deduction. And since you need some income to qualify for ACA, this is pretty much a no brainer. Given these account balance, I am guessing there is about a 0% chance of getting most of the money out of the 403b while paying less than 12%. Given that if ACA wasn't an issue taking out like 105k/year would be the way to go. With the ACA, you are paying like an 8% "tax" on every dollar you take out on top of income taxes. If it is worth paying 20% now is a lot more questionable. You would need to run some numbers on what your rates would be on the money when SS kicks in. When I ran my number with my assumptions it was pretty much a wash and you end up having to think about how you feel about spending down your accounts early (i.e. you are paying those taxes today instead of in 15 years) versus having that money sitting in ROTHs. There are still unknowns (i.e. market dropping 50% and staying there gives vastly different results than it going up 100%) that you can't eliminate but it lets you make some educated guesses.
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