401k spend down best options for taxes, etc?

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newinvesting2021
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401k spend down best options for taxes, etc?

Post by newinvesting2021 »

hello all!

I have a large traditional 401k.

I left my job Sept 2021, but will probably get another one in the near future, maybe this year.
I was 55 when I left my job so I dont pay the 10% early 401k distributution to Roth ira. I will be 56 next month-single.
I want to start spending down my 401k due to a number of reasons, RMDs, medicare (they use distrubutions to calculate medicare amount 2 years before?), SS torpedo, ACA-the health insurance thing is a killer, etc
I was thinking of making distribution to push me into the 32-35% tax bracket for a few years before I turn 63 when that would be used for medicare calculations, to try to bring that 401k amount down. I am currently in the 24% bracket due to work income- and a RI state tax, so I will assume I will stay in that bracket for at least a couple of years, then try to find something with health insurance that is part time-impossible in my field)

I'm trying to be tax conscience today and the future....I would take suggestions? Thank you for all your help!
KlangFool
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Re: 401k spend down best options for taxes, etc?

Post by KlangFool »

OP,

What is the actual amount in Trad 401K? 2 millions or more?

There is no 10% tax penalty to Roth convert to Roth IRA at any age.

KlangFool
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KlangFool
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Re: 401k spend down best options for taxes, etc?

Post by KlangFool »

https://www.madfientist.com/how-to-acce ... nds-early/

OP,

You should check out this URL.

KlangFool
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Topic Author
newinvesting2021
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Re: 401k spend down best options for taxes, etc?

Post by newinvesting2021 »

KlangFool wrote: Sat Sep 25, 2021 7:14 am OP,

What is the actual amount in Trad 401K? 2 millions or more?

There is no 10% tax penalty to Roth convert to Roth IRA at any age.

KlangFool
Thanks Kangfool, <1M
There is a 10% early penalty to convert traditional 401k to Roth ira before 59.5, but since I left my last job at 55, I don't have to pay that and my 401k admin allows it per IRS reg https://www.irs.gov/taxtopics/tc558. Since I would do a traditional 401k to a Roth ira, it is considered a distributuion and taxed at ordinary income. Since I will be going to a 401k to Roth ira there is no conversion ladder necessary, so that link doesn't help my situation. thanks again!
babystep
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Re: 401k spend down best options for taxes, etc?

Post by babystep »

newinvesting2021 wrote: Sat Sep 25, 2021 6:57 am hello all!


I want to start spending down my 401k due to a number of reasons, RMDs, medicare (they use distrubutions to calculate medicare amount 2 years before?), SS torpedo, ACA-the health insurance thing is a killer, etc
Did you calculate how much your income will be because of above?

To cross the 24% bracket as single, one must be making 175k per year.

Are you sure that you will be making 175k per year post retirement?
Topic Author
newinvesting2021
Posts: 31
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Re: 401k spend down best options for taxes, etc?

Post by newinvesting2021 »

babystep wrote: Sun Sep 26, 2021 12:47 am
newinvesting2021 wrote: Sat Sep 25, 2021 6:57 am hello all!


I want to start spending down my 401k due to a number of reasons, RMDs, medicare (they use distrubutions to calculate medicare amount 2 years before?), SS torpedo, ACA-the health insurance thing is a killer, etc
Did you calculate how much your income will be because of above?

To cross the 24% bracket as single, one must be making 175k per year.

Are you sure that you will be making 175k per year post retirement?
thank you ....yes since 401k roll over to Roth ira is considered a distribution and calculated as ordinary income so that plus my salary. It will be around 200k for most likely >10 years, I want to slow that down 2 years before medicare due to the medicare calculation at age 63
babystep
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Re: 401k spend down best options for taxes, etc?

Post by babystep »

newinvesting2021 wrote: Sun Sep 26, 2021 1:16 am
babystep wrote: Sun Sep 26, 2021 12:47 am
newinvesting2021 wrote: Sat Sep 25, 2021 6:57 am hello all!


I want to start spending down my 401k due to a number of reasons, RMDs, medicare (they use distrubutions to calculate medicare amount 2 years before?), SS torpedo, ACA-the health insurance thing is a killer, etc
Did you calculate how much your income will be because of above?

To cross the 24% bracket as single, one must be making 175k per year.

Are you sure that you will be making 175k per year post retirement?
thank you ....yes since 401k roll over to Roth ira is considered a distribution and calculated as ordinary income so that plus my salary. It will be around 200k for most likely >10 years, I want to slow that down 2 years before medicare due to the medicare calculation at age 63
If you spread 401k distribution to 30 years instead of 10+ years then it will save a lot in income tax. e.g. if you can reduce from 200k->175k then you save about $2,000 per year in the federal income tax.

Additional medicare part B premium cost is like $60 per month when single income MAGI is above 88k and up-to 110k.
Is your MAGI going to be above 88k when age 63? Even yes, it is worth paying 2k per year in tax to save $720 for medicare part B?

Make sure that you are not overthinking about the medicare cost and paying way more in income tax.
Topic Author
newinvesting2021
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Joined: Sun Sep 19, 2021 3:22 pm

Re: 401k spend down best options for taxes, etc?

Post by newinvesting2021 »

babystep wrote: Sun Sep 26, 2021 2:14 am
newinvesting2021 wrote: Sun Sep 26, 2021 1:16 am
babystep wrote: Sun Sep 26, 2021 12:47 am
newinvesting2021 wrote: Sat Sep 25, 2021 6:57 am hello all!


I want to start spending down my 401k due to a number of reasons, RMDs, medicare (they use distrubutions to calculate medicare amount 2 years before?), SS torpedo, ACA-the health insurance thing is a killer, etc
Did you calculate how much your income will be because of above?

To cross the 24% bracket as single, one must be making 175k per year.

Are you sure that you will be making 175k per year post retirement?
thank you ....yes since 401k roll over to Roth ira is considered a distribution and calculated as ordinary income so that plus my salary. It will be around 200k for most likely >10 years, I want to slow that down 2 years before medicare due to the medicare calculation at age 63
If you spread 401k distribution to 30 years instead of 10+ years then it will save a lot in income tax. e.g. if you can reduce from 200k->175k then you save about $2,000 per year in the federal income tax.

Additional medicare part B premium cost is like $60 per month when single income MAGI is above 88k and up-to 110k.
Is your MAGI going to be above 88k when age 63? Even yes, it is worth paying 2k per year in tax to save $720 for medicare part B?

Make sure that you are not overthinking about the medicare cost and paying way more in income tax.
thank you babystep, I think I may be overthinking this....I'm going to take a break from this and talk to my CPA....I'm just trying to figure out how people with large 401ks in the 1M or > do it without paying huge taxes when they are >65 and then 72 with RMDs? That is a reason I wanted to draw down my 401k and pay taxes sooner than later? 30 years? I'd like to get 20.....thanks again!!
MrJedi
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Re: 401k spend down best options for taxes, etc?

Post by MrJedi »

I think you are overthinking it. First of all given your ages your first RMD will be age 72. Next, with a 1M balance your first RMD is only 39k.

Also maybe irrelevant now, but it does not matter if you are age 55+ if your goal is Roth conversion. Roth conversion does not need qualification to be penalty free. You need the qualification if you want to simply withdraw the money to spend.
KlangFool
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Re: 401k spend down best options for taxes, etc?

Post by KlangFool »

newinvesting2021 wrote: Sun Sep 26, 2021 1:16 am
babystep wrote: Sun Sep 26, 2021 12:47 am
newinvesting2021 wrote: Sat Sep 25, 2021 6:57 am hello all!


I want to start spending down my 401k due to a number of reasons, RMDs, medicare (they use distrubutions to calculate medicare amount 2 years before?), SS torpedo, ACA-the health insurance thing is a killer, etc
Did you calculate how much your income will be because of above?

To cross the 24% bracket as single, one must be making 175k per year.

Are you sure that you will be making 175k per year post retirement?
thank you ....yes since 401k roll over to Roth ira is considered a distribution and calculated as ordinary income so that plus my salary. It will be around 200k for most likely >10 years, I want to slow that down 2 years before medicare due to the medicare calculation at age 63
But, you don't have to do that.

You can rollover the 401K to trad ira. That is not a distribution. Then, you do your Roth conversion from Trad ira to Roth IRA.

Your 401K balance is too small for you to worry about those problems.

KlangFool
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Topic Author
newinvesting2021
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Re: 401k spend down best options for taxes, etc?

Post by newinvesting2021 »

MrJedi wrote: Sun Sep 26, 2021 5:53 am I think you are overthinking it. First of all given your ages your first RMD will be age 72. Next, with a 1M balance your first RMD is only 39k.

Also maybe irrelevant now, but it does not matter if you are age 55+ if your goal is Roth conversion. Roth conversion does not need qualification to be penalty free. You need the qualification if you want to simply withdraw the money to spend.
Thank you! I may be overthinking it as you have also said. But also the 7 year rule if I dont start taking out my 1M 401k now it will be about 2M when I am 64, about 3M when I am 72....that adds up fast and in todays $$ would be about 75K just for RMDs. Just trying to think ahead.

A traditional 401k to Roth ira is a distribution, so hence you pay taxes on that distribution and is counted as ordinary income. If I want roll over my traditional 401k to Roth ira at 55, it would be a 10% early distribution, but I qualify as I left my employer after I turned 55. I dont have to do a Roth ladder as you are suggesting as I can just go from Traditional 401k to Roth ira. But Roth conversion ladders are also tax and considered distributions when they go from IRA (converted from traditiona 401K) to Roth ira conversions.

Just trying to figure out if I should pay taxes now as I have access to spend it down and not pay the early penalty withdrawal to roll it over to my Roth ira. I think it would help if I talked to a CPA.

Thank you all for your help! I appreciate all your insight.
Last edited by newinvesting2021 on Sun Sep 26, 2021 8:16 am, edited 1 time in total.
MrJedi
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Re: 401k spend down best options for taxes, etc?

Post by MrJedi »

newinvesting2021 wrote: Sun Sep 26, 2021 8:13 am
MrJedi wrote: Sun Sep 26, 2021 5:53 am I think you are overthinking it. First of all given your ages your first RMD will be age 72. Next, with a 1M balance your first RMD is only 39k.

Also maybe irrelevant now, but it does not matter if you are age 55+ if your goal is Roth conversion. Roth conversion does not need qualification to be penalty free. You need the qualification if you want to simply withdraw the money to spend.
Thank you! I may be overthinking it as you have also said. But also the 7 year rule if I dont start taking out my 1M 401k now it will be about 2M when I am 64, about 3M when I am 72....that adds up fast and in todays $$ would be about 75K just for RMDs. Just trying to think ahead.

A traditional 401k to Roth ira is a distribution, so hence you pay taxes on that distribution and is counted as ordinary income. If I want roll over my traditional 401k to Roth ira at 55, it would be a 10% early distribution, but I qualify as I left my employer after I turned 55.

Just trying to figure out if I should pay taxes now as I have access to spend it down and not pay the early penalty withdrawal to roll it over to my Roth ira. I think it would help if I talked to a CPA.

Thank you all for your help! I appreciate all your insight.
A rollover from 401k to IRA is not subject to early penalty.

Most people control their traditional balances by putting their fixed income / bond allocation there.

Also do not forget that tax brackets are also adjusted to inflation.
Topic Author
newinvesting2021
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Re: 401k spend down best options for taxes, etc?

Post by newinvesting2021 »

MrJedi wrote: Sun Sep 26, 2021 8:16 am
newinvesting2021 wrote: Sun Sep 26, 2021 8:13 am
MrJedi wrote: Sun Sep 26, 2021 5:53 am I think you are overthinking it. First of all given your ages your first RMD will be age 72. Next, with a 1M balance your first RMD is only 39k.

Also maybe irrelevant now, but it does not matter if you are age 55+ if your goal is Roth conversion. Roth conversion does not need qualification to be penalty free. You need the qualification if you want to simply withdraw the money to spend.
Thank you! I may be overthinking it as you have also said. But also the 7 year rule if I dont start taking out my 1M 401k now it will be about 2M when I am 64, about 3M when I am 72....that adds up fast and in todays $$ would be about 75K just for RMDs. Just trying to think ahead.

A traditional 401k to Roth ira is a distribution, so hence you pay taxes on that distribution and is counted as ordinary income. If I want roll over my traditional 401k to Roth ira at 55, it would be a 10% early distribution, but I qualify as I left my employer after I turned 55.

Just trying to figure out if I should pay taxes now as I have access to spend it down and not pay the early penalty withdrawal to roll it over to my Roth ira. I think it would help if I talked to a CPA.

Thank you all for your help! I appreciate all your insight.
A rollover from 401k to IRA is not subject to early penalty.

Most people control their traditional balances by putting their fixed income / bond allocation there.

Also do not forget that tax brackets are also adjusted to inflation.
thank you! I think the confusion here is: I am specifically talking about a traditional 401k rollover to a Roth IRA (tax consequence as it is a distribtution-this is relatively new), not a traditional 401K to an IRA (no tax consequences as not a distribution).

A roll over from a traditonal 401k to a Roth ira is a distribution and taxed at ordinary income.
A traditionl 401k to IRA is not taxed, but when that IRA is rolled over to a Roth ira it is a distribution and taxed as ordinary income and taxes are paid, I just dont have to do a Roth conversion ladder I can just go from traditional 401k to Roth ira, and that is a distribution and taxed.
KlangFool
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Re: 401k spend down best options for taxes, etc?

Post by KlangFool »

newinvesting2021 wrote: Sun Sep 26, 2021 8:27 am
A roll over from a traditonal 401k to a Roth ira is a distribution and taxed at ordinary income.
A traditionl 401k to IRA is not taxed, but when that IRA 401K is rolled over to a Roth ira it is a distribution and taxed as ordinary income and taxes are paid, I just dont have to do a Roth conversion ladder I can just go from traditional 401k to Roth ira, and that is a distribution and taxed.
newinvesting2021,

<<A traditionl 401k to IRA is not taxed, but when that IRA 401K is rolled over to a Roth ira it is a distribution and taxed as ordinary income and taxes are paid,>>

401K is not IRA. Please use the right term.

<<I just dont have to do a Roth conversion ladder I can just go from traditional 401k to Roth ira, and that is a distribution and taxed.>>

But, it is advantageous for you to do it. So, why won't you do it? Why do you CHOOSE to pay the 10% tax penalty?

401K rollover to Trad IRA -> No tax

Trad IRA -> Roth conversion -> Roth IRA -> only tax but no penalty.

KlangFool
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KlangFool
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Re: 401k spend down best options for taxes, etc?

Post by KlangFool »

newinvesting2021 wrote: Sun Sep 26, 2021 8:13 am
Thank you! I may be overthinking it as you have also said. But also the 7 year rule if I dont start taking out my 1M 401k now it will be about 2M when I am 64, about 3M when I am 72....that adds up fast and in todays $$ would be about 75K just for RMDs. Just trying to think ahead.
newinvesting2021,

<< I dont start taking out my 1M 401k now it will be about 2M when I am 64, >>

Why would that be true? What is your Asset Allocation (AA)? What is your return rate?

My overall AA is 60/40. I have about 1 million in my Trad IRA/401K. My AA in the Trad IRA/401K has a lot more fixed income/bond. It would not double in 7 years.

In any case, it won't matter. I would early retire way before 64 years old.

KlangFool
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MrJedi
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Re: 401k spend down best options for taxes, etc?

Post by MrJedi »

newinvesting2021 wrote: Sun Sep 26, 2021 8:27 am thank you! I think the confusion here is: I am specifically talking about a traditional 401k rollover to a Roth IRA (tax consequence as it is a distribtution-this is relatively new), not a traditional 401K to an IRA (no tax consequences as not a distribution).

A roll over from a traditonal 401k to a Roth ira is a distribution and taxed at ordinary income.
A traditionl 401k to IRA is not taxed, but when that IRA is rolled over to a Roth ira it is a distribution and taxed as ordinary income and taxes are paid, I just dont have to do a Roth conversion ladder I can just go from traditional 401k to Roth ira, and that is a distribution and taxed.
As mentioned, it doesn't matter now due to your age, but a traditional 401k rollover to Roth IRA is not subject to early 10% penalty even if you were under 55. It is taxed, but that is different than the 10% penalty you are referencing. Since you are 55, it does not really matter, I just wanted to add this since you seem to think this changes your strategy somehow but it is actually irrelevant.
Topic Author
newinvesting2021
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Re: 401k spend down best options for taxes, etc?

Post by newinvesting2021 »

MrJedi wrote: Sun Sep 26, 2021 10:33 am
newinvesting2021 wrote: Sun Sep 26, 2021 8:27 am thank you! I think the confusion here is: I am specifically talking about a traditional 401k rollover to a Roth IRA (tax consequence as it is a distribtution-this is relatively new), not a traditional 401K to an IRA (no tax consequences as not a distribution).

A roll over from a traditonal 401k to a Roth ira is a distribution and taxed at ordinary income.
A traditionl 401k to IRA is not taxed, but when that IRA is rolled over to a Roth ira it is a distribution and taxed as ordinary income and taxes are paid, I just dont have to do a Roth conversion ladder I can just go from traditional 401k to Roth ira, and that is a distribution and taxed.
As mentioned, it doesn't matter now due to your age, but a traditional 401k rollover to Roth IRA is not subject to early 10% penalty even if you were under 55. It is taxed, but that is different than the 10% penalty you are referencing. Since you are 55, it does not really matter, I just wanted to add this since you seem to think this changes your strategy somehow but it is actually irrelevant.
thank you all! I appreciate everyone posting and reading. yes that is it was the 55 question I had and yes thinking that it could change my strategy. Hope everyone has a great weekend!
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teen persuasion
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Re: 401k spend down best options for taxes, etc?

Post by teen persuasion »

newinvesting2021 wrote: Sat Sep 25, 2021 6:57 am hello all!

I have a large traditional 401k.

I left my job Sept 2021, but will probably get another one in the near future, maybe this year.
I was 55 when I left my job so I dont pay the 10% early 401k distributution to Roth ira. I will be 56 next month-single.
I want to start spending down my 401k due to a number of reasons, RMDs, medicare (they use distrubutions to calculate medicare amount 2 years before?), SS torpedo, ACA-the health insurance thing is a killer, etc
I was thinking of making distribution to push me into the 32-35% tax bracket for a few years before I turn 63 when that would be used for medicare calculations, to try to bring that 401k amount down. I am currently in the 24% bracket due to work income- and a RI state tax, so I will assume I will stay in that bracket for at least a couple of years, then try to find something with health insurance that is part time-impossible in my field)

I'm trying to be tax conscience today and the future....I would take suggestions? Thank you for all your help!
OP, are you trying to withdraw from your 401k now to spend it down (on living expenses)? Or are you trying to control the future growth of your 401k to limit RMDs?

Spending down is different from Roth converting.

If you just want to withdraw for $ for expenses now, and you can use the Rule of 55 (does your former employer allow partial withdrawals, or only one complete distribution?) you can do that. Not every employer makes it possible to effectively use the Rule of 55 - DH's employer did not allow partial withdrawals. So we will be using a Roth conversion ladder to access rollover tIRA accounts prior to age 59.5 penalty free.

But another reason we are Roth converting is to shift our balances from tIRA to Roth IRA gradually over time, to limit the size of our RMDs later, reducing taxes. Now is a good time to do that for us, since DH has retired so our other ordinary income is low. We can fill up the standard deduction and lower tax brackets with Roth conversions.

Then there's tax efficient placement of assets. We have only equities in our Roth IRAs, and a mix of equities + bonds in our tIRA accounts. So the tIRA balances should grow more slowly. Over time, as more gets shifted from trad to Roth, the % of bonds in trad will become greater, further slowing growth, so that conversions shift more each year (early we'd mostly just be skimming off new growth, later actually shrinking the balance).
Topic Author
newinvesting2021
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Re: 401k spend down best options for taxes, etc?

Post by newinvesting2021 »

teen persuasion wrote: Sun Sep 26, 2021 10:43 am
newinvesting2021 wrote: Sat Sep 25, 2021 6:57 am hello all!

I have a large traditional 401k.

I left my job Sept 2021, but will probably get another one in the near future, maybe this year.
I was 55 when I left my job so I dont pay the 10% early 401k distributution to Roth ira. I will be 56 next month-single.
I want to start spending down my 401k due to a number of reasons, RMDs, medicare (they use distrubutions to calculate medicare amount 2 years before?), SS torpedo, ACA-the health insurance thing is a killer, etc
I was thinking of making distribution to push me into the 32-35% tax bracket for a few years before I turn 63 when that would be used for medicare calculations, to try to bring that 401k amount down. I am currently in the 24% bracket due to work income- and a RI state tax, so I will assume I will stay in that bracket for at least a couple of years, then try to find something with health insurance that is part time-impossible in my field)

I'm trying to be tax conscience today and the future....I would take suggestions? Thank you for all your help!
OP, are you trying to withdraw from your 401k now to spend it down (on living expenses)? Or are you trying to control the future growth of your 401k to limit RMDs?

Spending down is different from Roth converting.

If you just want to withdraw for $ for expenses now, and you can use the Rule of 55 (does your former employer allow partial withdrawals, or only one complete distribution?) you can do that. Not every employer makes it possible to effectively use the Rule of 55 - DH's employer did not allow partial withdrawals. So we will be using a Roth conversion ladder to access rollover tIRA accounts prior to age 59.5 penalty free.

But another reason we are Roth converting is to shift our balances from tIRA to Roth IRA gradually over time, to limit the size of our RMDs later, reducing taxes. Now is a good time to do that for us, since DH has retired so our other ordinary income is low. We can fill up the standard deduction and lower tax brackets with Roth conversions.

Then there's tax efficient placement of assets. We have only equities in our Roth IRAs, and a mix of equities + bonds in our tIRA accounts. So the tIRA balances should grow more slowly. Over time, as more gets shifted from trad to Roth, the % of bonds in trad will become greater, further slowing growth, so that conversions shift more each year (early we'd mostly just be skimming off new growth, later actually shrinking the balance).
Teen pursuasion thank you....I am trying to spend down to control the future growth of my 401k and to try limit future tax consequences, RMDs, getting health insurance, SS everything.
My employer allows unlimited # of partial withdrawals and my employer also allows 401k to Roth ira directly. and I can use the rule of 55 now as it is in my plan documents and I have chatted with the plan admisitrator. Just trying to figure out timing. And yes then there is the question of tax efficient placement of assets.
thank you again!
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teen persuasion
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Re: 401k spend down best options for taxes, etc?

Post by teen persuasion »

Sorry, I'm still not clear. You are planning to withdraw from your 401k for living expenses going forward? But you also mentioned getting another job, perhaps this year, perhaps later.

If you are looking to tap the 401k for expenses, what's your proposed withdrawal rate? Will your 401k sustain you indefinitely?

**********

If you are not actually planning to spend from the 401k now, and are trying to manage the size of your tax deferred account by taking distributions - where do you intend to put those distributions? You could put them in a taxable account, but there'd be tax drag. You could instead put them into a Roth IRA (convert instead of withdraw) where they'd never be taxed again. The tax cost of withdraw vs convert is the same.

What do you expect your tax rate to be at RMD time? Converting or withdrawing now at a higher rate (earning+distribution) makes little sense. But if you are no longer earning (putting you in a lower tax bracket) conversions now could make sense.
exodusNH
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Re: 401k spend down best options for taxes, etc?

Post by exodusNH »

newinvesting2021 wrote: Sun Sep 26, 2021 8:13 am
MrJedi wrote: Sun Sep 26, 2021 5:53 am I think you are overthinking it. First of all given your ages your first RMD will be age 72. Next, with a 1M balance your first RMD is only 39k.

Also maybe irrelevant now, but it does not matter if you are age 55+ if your goal is Roth conversion. Roth conversion does not need qualification to be penalty free. You need the qualification if you want to simply withdraw the money to spend.
Thank you! I may be overthinking it as you have also said. But also the 7 year rule if I dont start taking out my 1M 401k now it will be about 2M when I am 64, about 3M when I am 72....that adds up fast and in todays $$ would be about 75K just for RMDs. Just trying to think ahead.

A traditional 401k to Roth ira is a distribution, so hence you pay taxes on that distribution and is counted as ordinary income. If I want roll over my traditional 401k to Roth ira at 55, it would be a 10% early distribution, but I qualify as I left my employer after I turned 55. I dont have to do a Roth ladder as you are suggesting as I can just go from Traditional 401k to Roth ira. But Roth conversion ladders are also tax and considered distributions when they go from IRA (converted from traditiona 401K) to Roth ira conversions.

Just trying to figure out if I should pay taxes now as I have access to spend it down and not pay the early penalty withdrawal to roll it over to my Roth ira. I think it would help if I talked to a CPA.

Thank you all for your help! I appreciate all your insight.
The only way your balance doubles every 7 years is if the market returns about 10% per year. I hope you're not planning on that happening.
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newinvesting2021
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Re: 401k spend down best options for taxes, etc?

Post by newinvesting2021 »

exodusNH wrote: Sun Sep 26, 2021 12:06 pm
newinvesting2021 wrote: Sun Sep 26, 2021 8:13 am
MrJedi wrote: Sun Sep 26, 2021 5:53 am I think you are overthinking it. First of all given your ages your first RMD will be age 72. Next, with a 1M balance your first RMD is only 39k.

Also maybe irrelevant now, but it does not matter if you are age 55+ if your goal is Roth conversion. Roth conversion does not need qualification to be penalty free. You need the qualification if you want to simply withdraw the money to spend.
Thank you! I may be overthinking it as you have also said. But also the 7 year rule if I dont start taking out my 1M 401k now it will be about 2M when I am 64, about 3M when I am 72....that adds up fast and in todays $$ would be about 75K just for RMDs. Just trying to think ahead.

A traditional 401k to Roth ira is a distribution, so hence you pay taxes on that distribution and is counted as ordinary income. If I want roll over my traditional 401k to Roth ira at 55, it would be a 10% early distribution, but I qualify as I left my employer after I turned 55. I dont have to do a Roth ladder as you are suggesting as I can just go from Traditional 401k to Roth ira. But Roth conversion ladders are also tax and considered distributions when they go from IRA (converted from traditiona 401K) to Roth ira conversions.

Just trying to figure out if I should pay taxes now as I have access to spend it down and not pay the early penalty withdrawal to roll it over to my Roth ira. I think it would help if I talked to a CPA.

Thank you all for your help! I appreciate all your insight.
The only way your balance doubles every 7 years is if the market returns about 10% per year. I hope you're not planning on that happening.
thank you, I've read that a few places....but that has not been my particular situation (just thought I was not great at investing!) This is an amazing board, I am very fortunate that so many people took the time to read and respond. I am grateful. I hope everyone has a great weekend!
exodusNH
Posts: 10344
Joined: Wed Jan 06, 2021 7:21 pm

Re: 401k spend down best options for taxes, etc?

Post by exodusNH »

newinvesting2021 wrote: Sun Sep 26, 2021 2:05 pm
exodusNH wrote: Sun Sep 26, 2021 12:06 pm
newinvesting2021 wrote: Sun Sep 26, 2021 8:13 am
MrJedi wrote: Sun Sep 26, 2021 5:53 am I think you are overthinking it. First of all given your ages your first RMD will be age 72. Next, with a 1M balance your first RMD is only 39k.

Also maybe irrelevant now, but it does not matter if you are age 55+ if your goal is Roth conversion. Roth conversion does not need qualification to be penalty free. You need the qualification if you want to simply withdraw the money to spend.
Thank you! I may be overthinking it as you have also said. But also the 7 year rule if I dont start taking out my 1M 401k now it will be about 2M when I am 64, about 3M when I am 72....that adds up fast and in todays $$ would be about 75K just for RMDs. Just trying to think ahead.

A traditional 401k to Roth ira is a distribution, so hence you pay taxes on that distribution and is counted as ordinary income. If I want roll over my traditional 401k to Roth ira at 55, it would be a 10% early distribution, but I qualify as I left my employer after I turned 55. I dont have to do a Roth ladder as you are suggesting as I can just go from Traditional 401k to Roth ira. But Roth conversion ladders are also tax and considered distributions when they go from IRA (converted from traditiona 401K) to Roth ira conversions.

Just trying to figure out if I should pay taxes now as I have access to spend it down and not pay the early penalty withdrawal to roll it over to my Roth ira. I think it would help if I talked to a CPA.

Thank you all for your help! I appreciate all your insight.
The only way your balance doubles every 7 years is if the market returns about 10% per year. I hope you're not planning on that happening.
thank you, I've read that a few places....but that has not been my particular situation (just thought I was not great at investing!) This is an amazing board, I am very fortunate that so many people took the time to read and respond. I am grateful. I hope everyone has a great weekend!
It's been a great few years! I certainly hope it continues, but if people make life plans based on it continuing, it could really bite them.
Topic Author
newinvesting2021
Posts: 31
Joined: Sun Sep 19, 2021 3:22 pm

Re: 401k spend down best options for taxes, etc?

Post by newinvesting2021 »

teen persuasion wrote: Sun Sep 26, 2021 11:59 am Sorry, I'm still not clear. You are planning to withdraw from your 401k for living expenses going forward? But you also mentioned getting another job, perhaps this year, perhaps later.

If you are looking to tap the 401k for expenses, what's your proposed withdrawal rate? Will your 401k sustain you indefinitely?

**********

If you are not actually planning to spend from the 401k now, and are trying to manage the size of your tax deferred account by taking distributions - where do you intend to put those distributions? You could put them in a taxable account, but there'd be tax drag. You could instead put them into a Roth IRA (convert instead of withdraw) where they'd never be taxed again. The tax cost of withdraw vs convert is the same.

What do you expect your tax rate to be at RMD time? Converting or withdrawing now at a higher rate (earning+distribution) makes little sense. But if you are no longer earning (putting you in a lower tax bracket) conversions now could make sense.
thank you trying to manage my 401k size. I would roll it over to a Roth ira, which is a distribution and I would pay ordinary income on it. I think my tax rate in retirment would be higher than it is now...hence the 401k to Roth ira roll over.
KlangFool
Posts: 31525
Joined: Sat Oct 11, 2008 12:35 pm

Re: 401k spend down best options for taxes, etc?

Post by KlangFool »

newinvesting2021 wrote: Mon Sep 27, 2021 12:07 pm

thank you trying to manage my 401k size. I would roll it over to a Roth ira, which is a distribution and I would pay ordinary income on it. I think my tax rate in retirment would be higher than it is now...hence the 401k to Roth ira roll over.
newinvesting2021,

That is not likely to be possible.

Please explain why do you think that is possible.

You need about 100K or more retirement income. How do you achieve that?

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